Week 2

Question 1

Describe a demand curve:

Answer 1

A demand curve is a function that shows the quantity demanded at different prices.

Question 2

Define ‘quantity demanded’

Answer 2

The quantity demanded is the quantity that buyers are willing and able to buy at a particular price.

Question 3

Define the ‘law of demand’

Answer 3

The lower the price, the greater the quantity demanded

Question 4

Explain Consumer surplus

Answer 4

Consumer surplus is the consumers gain from the exchange or the difference between the maximum price a customer is willing to pay for a certain quantity and its market price.

Question 5

How is the total consumer surplus measured?

Answer 5

The total consumer surplus is measured by the area beneath the demand curve and above the price.

Question 6

How is total consumer surplus calculated?

Answer 6

Area of triangle:

( Base x Height ) / 2

Question 7

What effect does an increase in demand have on the demand curve?

Answer 7

Increase in demand shifts the demand curve outward, up and to the right.

Question 8

What effect does a decrease in demand have on the demand curve?

Answer 8

A decrease in demand shifts the demand curve inward, down and to the left.

Question 9

What are the 6 most important demand shifters?

Answer 9

• Income
• Population
• Price of substitutes
• Price of complements
• Expectations
• Tastes

Question 10

How does income shift demand?

Answer 10

When people get richer, they buy more stuff.

Question 11

Describe a ‘normal good’.

Answer 11

When an increase in income increases the demand for a good, we call it a normal good.

Question 12

Describe a ‘inferior good’.

Answer 12

A good for which an increase in income decreases the demand is called an inferior good.

Question 13

How can population shift demand?

Answer 13

More people, more demand

Question 14

How do price of substitutes shift demand?

Answer 14

If two goods are substitutes, a decrease in the price of one good leads to a decrease in the demand for the other good.

Question 15

How do the price of complements shift demand?

Answer 15

If two goods are complements, a decrease in the price of one good leads to an increase in the demand for the other good.

Question 16

Describe complements

Answer 16

Complements are things that go well together.

Question 17

How do expectations shift demand?

Answer 17

The expectation of a reduction in the future oil supply increases the oil demand today.

Question 18

How does taste shift demand?

Answer 18

Changes in tastes caused by fads, fashions, and advertising can all increase or decrease demand

Question 19

Define the ‘supply curve’

Answer 19

The supply curve is a function that shows the quantity supplied at different prices.

Question 20

Describe ‘the quantity supplied’.

Answer 20

The quantity supplied is the amount of a good that sellers are willing and able to sell at a particular price.

Question 21

Define the ‘law of supply’

Answer 21

The higher the price, the greater the quantity supplied.

Question 22

Explain producer surplus

Answer 22

Producer surplus is the producer’s gain from the exchange or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity.

Question 23

How is total producer surplus measured?

Answer 23

By the area above the supply curve and below the price.

Question 24

What are the 5 most important supply shifters?

Answer 24

• Technological innovations and changes in price of inputs
• Taxes and subsidies
• Expectations
• Entry or exit of producers
• Changes in opportunity costs

Question 25

How do technological innovations and changes in price of inputs shift supply?

Answer 25

Improvements in technology can reduce costs, and thus increase supply.

Question 26

How do taxes and subsidies shift supply?

Answer 26

A tax on output is the same as an increase in costs.

Question 27

How can expectations shift supply?

Answer 27

Suppliers who expect that prices will increase in the future have an incentive to sell less today so that they can store goods for future sales.

Question 28

How do entry or exit of producers shift supply?

Answer 28

Entry of producers means an increase in supply, while exit of producers means a decrease in supply.

Question 29

How do changes in opportunity costs shift supply?

Answer 29

Suppose that a farmer is currently growing soy-beans; but that his land could also be used to grow wheat. If the price of wheat increases, the farmer's opportunity costs of growing soy-beans increase, and the farmer will want to shift land from the soy-bean production to the more profitable alternative of wheat production.

Question 30

What's the 'Invisible hand'?

Answer 30

Economic forces in a free market will always push and pull prices toward their equilibrium values.

Question 30

Describe a surplus:

Answer 30

A surplus is a situation in which the quantity supplied is greater than the quantity demanded. (Above equilibrium)

Question 30

Describe a shortage

Answer 30

A shortage is a situation in which the quantity demanded is greater than the quantity supplied. (Below equilibrium)

Question 30

Define the equilibrium price

Answer 30

The equilibrium price is the price at which the quantity demanded is equal to the quantity supplied.

Question 31

When we say that the free market maximizes the gains from trade, we mean three closely related things:

Answer 31

1. The supply of goods is bought by the buyers with the highest willingness to pay 2. The supply of goods is sold by the sellers with the lowest costs. 3. Between buyers and sellers, there are no unexploited gains from trade and no wasteful trades.