Lecture 2 (Supply&Demand)

Question 1

Assumption when discussing supply and demand:

Answer 1

perfect competition

Question 2

Demand depends on:

Answer 2

-price,
-preferences,
-budget,
-other products,
-expectations

Question 3

Supply depends on:

Answer 3

-price,
-input price,
-other goods,
-technology,
-expectations

Question 4

ceteris paribus meaning

Answer 4

all else equal (on demand curve all factors that affect demand are constant)

Question 5

Demand schedule

Answer 5

table of quantity of demand with diferent prices

Question 6

Demand and inverse demand functions

Answer 6

Demand function - Qd(p);
Inverse demand function - P(Qd)

Question 7

Normal good meaning

Answer 7

when income increases demand increases

Question 8

Inferior good meaning

Answer 8

when income increases, demand decreases

Question 9

Substitutes meaning

Answer 9

if the price of good Y increases, the demand for good X increases (Iphone - X, Samsung - Y)

Question 10

Complements

Answer 10

if the price of good Y increases, the demand for good X also increases (PC monitor - X, PC - Y)

Question 11

Surplus meaning

Answer 11

(Excess supply) - more supplied than there is demand

Question 12

Shortage meaning

Answer 12

(Excess demand) more demand than there is supplied

Question 13

Consumer surplus meaning

Answer 13

Money saved as willingless to pay was higher than actual price (consumer surplus = Willingless to pay -Actual price)

Question 14

Total consumer surplus meaning

Answer 14

Consumer surplus of all people (it’s the sum of area between the price and the demand curve

Question 15

Producer surplus meaning

Answer 15

difference between the price and the cost

Question 16

total surplus (total welfare) meaning

Answer 16

Area between demand and supply (CS+PS)

Question 17

price controls meaning

Answer 17

way for government to intervene in markets

Question 18

Price control can be achieved by:

Answer 18

-Price ceilings
-Price floors
-quota
-taxes
-subsidies

Question 19

Deadweight loss meaning

Answer 19

surplus that is lost

Question 20

Economic signal meaning

Answer 20

any piece of information that helps people make better economic decisions

Question 21

When markets fall short of efficiency?

Answer 21

1. Attempt to capture more surplus, one party prevents mutually beneficial trades from occuring
2. Side effects of actions of individuals on welfare of others that markets don’t take into account
3. Goods, by their very nature, were unsuited for efficient management by markets

Question 22

Wedge meaning

Answer 22

the difference between what customers pay and suppliers receive [atotrūkis]

Question 23

Quota rent meaning

Answer 23

Earnings that are received by the license-holder from ownership of a valuable commodity, the license

Question 24

Side effects of quantity controls

Answer 24

1. Deadweight loss (some mutually beneficial transactions don’t occur)
2. Incentives for illegal activities

Question 25

Binding price floor/ceiling meaning

Answer 25

Price floor/ceiling which exceedes and goes past the equilibrium

Question 26

Non-binding price floor/ceiling meaning

Answer 26

Price floor/ceiling which is too low to go past equilibrium