3: Demand & Supply

Question 1

Money price vs Relative price

Answer 1

Money price: Amount of money needed to buy a good

Relative price: Ratio of a good’s money price to the next best alternative’s money price (opportunity cost)

Question 2

What is the law of demand?

Answer 2

Everything remaining the same:
Higher the price, smaller the quantity demanded
Lower the price, larger the quantity demanded

Question 3

Substitute vs Complement

Answer 3

Substitute: Good that can be used in place of another good
Complement: Good that can be used in conjunction with another good

Question 4

Normal good vs Inferior good

Answer 4

Normal good: When income increases, demand of the good increases
Inferior good: When income increases, demand of the good decreases

Question 5

What is the law of supply?

Answer 5

Everything remaining the same:
Higher the price, greater the quantity supplied
Lower the price, smaller the quantity supplied

Question 6

Change in supply vs Change in quantity supplied

Answer 6

Change in supply: When price of the good remains the same but one of the other influences on the seller’s plans changes (supply curve shifts)
Change in quantity supplied: When price of the good changes and other influences on sellers’ plans remain the same (movement along the supply curve)

Question 7

Equilibrium price & quantity

Answer 7

Price at which quantity demanded equals quantity supplied

Quantity bought and sold at the equilibrium price

Question 8

Price adjustments: Surplus & Shortage

Answer 8

Surplus: Quantity supplied exceeds quantity demanded (forces the price down)
Shortage: Quantity demanded exceeds quantity supplied (forces the price up)