Demand and Supply (Weeks 5-6)

Question 1

The quantity demanded of a good for any given price

Answer 1

Demand curve

Question 2

Law that states other things being equal, the demand of g1 increases when the price of g1 decreases (negative relationship)

Answer 2

Law of Demand

Question 3

What is the exception to the Law of Demand?

Answer 3

Giffen good

Question 4

When the demand of g1 decreases when the price of g1 decreases

Answer 4

Inferior good

Question 5

As price increases, demand increases

Answer 5

Giffen good

Question 6

When the demand of g1 increases when the price decreases

Answer 6

Normal good

Question 7

True or false: A giffen good is an inferior good

Answer 7

True

Question 8

What drives the substitution effect?

Answer 8

Change in the relative prices of the goods

Question 9

What drives the income effect?

Answer 9

Change in purchasing power of buyer

Question 10

If two goods are perfect substitutes and the price of y decreases, how are the quantities demanded of y and x affected?

Answer 10

Quantity demanded of y increases and quantity demanded of x decreases

Only substitution effects, no income effects

Question 11

If two goods are perfect compliments and the price of y decreases, how are the quantities of y and x affected?

Answer 11

Quantity of y increases and quantity of x increases because there are only income effects, not substitution effects

Question 12

Amount of the good that buyers are willing (preference) and able (budget) to purchase

Answer 12

Quantity demanded

Question 13

The maximum amount that a buyer will pay for a good

Answer 13

Willingness To Pay (WTP)

Question 14

What does Willingness To Pay (WTP) measure?

Answer 14

How much that buyer values the good

Question 15

What does each point on the demand curve represent?

Answer 15

Consumer’s willingness to pay for that quantity (or marginal benefit)

Question 16

Graphically, what represents a consumer’s willingness to pay?

Answer 16

The height of the demand curve

Also called marginal benefit

Question 17

Shows the quantity supplied of a good or service at each market price

Answer 17

Supply curve

Question 18

Is the supply or demand curve the outcome of utility maximization by individuals?

Answer 18

Demand curve

Question 19

Is the supply or demand curve the outcome of profit maximization by firms?

Answer 19

Supply curve

Question 20

Impact of a one-unit change in an input on the firm’s output, holding other inputs constant

Answer 20

Marginal productivity of that input

Question 21

What is the equation for marginal cost?

Answer 21

Wage rate * amount of labor needed to produce one more unit

Question 22

The difference between revenues and costs

Answer 22

Profit

Question 23

Condition when the revenue from the next unit (marginal revenue) equals cost of producing the next unit (marginal cost)

Answer 23

Profit maximization

Question 24

What factors shift demand along the demand curve? Is there a positive or negative relationship between price and demand?

Answer 24

Price of the good itself

Negative relationship between price and demand

Question 25

What three factors shift the demand curve?

Answer 25

1. Income 2. Price of related goods 3. Preferences (tastes) or other shocks

Question 26

How does income shift demand? Compare normal and inferior goods

Answer 26

If it is a normal good, positive relationship between income and demand--demand curve shifts right when income increases If it is an inferior good, negative relationship between income and demand--demand curve shifts left when income increases

Question 27

How does the price of related goods shift demand? Compare substitutes and complements

Answer 27

If two goods are substitutes, the demand for one good increases as the price of the other good increases (substitute away from more expensive good); positive relationship If two goods are complements, the demand for one good decreases as the price of the other good increases (because you need them together); negative relationship

Question 28

How do changes in preference or shocks shift demand?

Answer 28

Can shift demand left or right it depends

Question 29

Amount that sellers are willing and able to sell, holding constant other factors that influence firms' supply decisions

Answer 29

Quantity supplied

Question 30

Which law states that other things being equal, the supply of a good increases when the price of good increases (positive relationship)

Answer 30

Law of supply

Question 31

The quantity supplied of a good at each market price

Answer 31

Supply curve

Question 32

The increase in total cost that arises from an extra unit of production

Answer 32

Marginal cost

Question 33

What is the height of the supply curve?

Answer 33

Marginal cost

Question 34

What factors create movement along the supply curve? Positive or negative relationship between price and supply?

Answer 34

The price of the good itself Positive relationship between price and supply

Question 35

What two factors shift supply?

Answer 35

1. Price of inputs 2. Conditions of production

Question 36

What are the four conditions of production that shift supply?

Answer 36

Government policies Technology Expectations Weather

Question 37

Does the price of inputs have a negative or positive effect on supply?

Answer 37

When the price increases, supply decreases (negative effect)

Question 38

What does each point on the supply curve represent?

Answer 38

The marginal cost of producing a unit of a good

Question 39

The sum of the quantity each consumer demands at that price

Answer 39

Market demand, also called total quantity demanded

Question 40

The sum of the quantity each supplier produced at that price

Answer 40

Market supply, also called the total quantity supplied

Question 41

Which type of goods are aggregated horizontally?

Answer 41

Private goods

Question 42

What is the protocol for deriving the demand curve?

Answer 42

To derive the demand curve, we change the price of one good and analyze how the optimal consumption bundle changes. As the price of goods changes, the budget line pivots, and the consumer's optimal bundle moves along different indifference curves.

Question 43

What shows the quantity demanded at each possible price?

Answer 43

Demand curve

Question 44

What are the x and y axes on a demand curve?

Answer 44

X: quantity demanded Y: price of good

Question 45

Shows the effect of all the relevant factors on the quantity demanded

Answer 45

Demand function

Question 46

How do you aggregate demand?

Answer 46

Combine the demand from individual consumers at the same price

Question 47

What are the x and y axes on a supply curve?

Answer 47

X: quantity supplied Y: price of good

Question 48

The limit a government sets on the quantity of a foreign-produced good that may be imported

Answer 48

Quota

Question 49

Mathematically, how do you find the equilibrium point given an equation of a line for quantity demanded and an equation of a line for quantity supplied, both in terms of price

Answer 49

Set the two lines equal to each other (where Qs = Qd) and solve for the equilibrium price

Question 50

Law that limits the number of firms that may sell goods in a market

Answer 50

Licensing law

Question 51

True or false: the quantity supplied is the amount actually supplied by firms

Answer 51

False; it is the quantity that firms want to sell at a given price, not the amount supplied

Question 52

True or false: the quantity demanded is the amount actually demanded by consumers

Answer 52

False; it is the quantity consumers are willing to buy at a given price

Question 53

What are the four conditions of a perfectly competitive market?

Answer 53

1. Everyone is a price taker 2. Firms sell identical products 3. Everyone has full information about the price and quality of goods 4. Costs of trading are low PPIC

Question 54

What does it mean to be a price taker?

Answer 54

As a firm or consumer, you cannot affect the market price This occurs when no consumer or firm is a very large part of the market and there is easy entry in and out of the market

Question 55

What defies the idea of a price taker

Answer 55

Monopolies

Question 56

What are the x and y axes of a demand curve?

Answer 56

y: price X: quantity demanded