Micro Review - Demand/Supply

Question 1

What are the 5 determinants of demand?

Answer 1

Price of the good
The income of the consumer
Prices of related goods
Tastes/Preferences of the consumer
Consumer expectations of the market (will future prices rise or fall)

Question 2

What is demand?

Answer 2

The amount of a good that consumers are willing to buy at any given price

Question 3

What is a demand function?

Answer 3

A function that shows the correspondence between the quantity demanded and the factors that influence a consumers decision to purchase

Question 4

What is a substitute good?

Provide an example

Answer 4

A good or service that may be consumed instead of another good or service with a relatively equal utility to the consumer

Tea as a substitute for coffee
Chicken over beef

Question 5

What is a complimentary good?

Provide an example

Answer 5

A good or service that is jointly consumed with another good or service

Sugar and Coffee
Lettuce and dressing
Hotdogs and ketchup/mustard

Question 6

What is a demand curve?

Answer 6

A graph that shows the quantity demanded at each possible price relative to the demand function of the good/service

Question 7

When a product’s price changes, what happens to the demand curve?

Answer 7

We will see a movement along the demand curve (+/-) to the corresponding quantity demanded

Question 8

What is the Law of Demand?

What does the term Center Paribus mean to the law of demand?

Answer 8

Consumers demand more of a good the lower the price.

Center Paribus means we “hold all else constant” ie all other determinants of demand besides the price (incomes and complimentary/substitute goods/services)

Question 9

What does dQd/dP tell us in regards to the demand curve? What are the 3 reasons we know this?

(a derivative of Qd in relation to P)

Answer 9

The derivative of the quantity demanded in regards to its price is always negative.

We know this because:

1. the Demand Curve is always downward sloping
2. the Law of Demand tells us that as price increases Qd decreases
3. P is our Y-Axis and Qd is our X-Axis and the slope of our demand curve is Δp/ΔQd and any + change to Δp causes a - change to ΔQd

Question 10

What causes a movement along a demand curve?

Answer 10

The change in the immediate good price

Question 11

What causes a shift of a demand curve?

Answer 11

The change of any factor besides the price of the immediate good

Question 12

What is Supply?

Answer 12

The amount of a good that firms are willing and able to sell at a given price

Question 13

What is the Law of Supply?

What does the term Center Paribus mean to the law of supply?

Answer 13

As the price for a good/service increases, producers will try to maximize profits and the supply for those goods/services will also increase

Center Paribus means we “hold all else constant” ie all other determinants of supply besides the price (input prices, market expectations, competition)

Question 14

What are the 4 determinants of supply?

Answer 14

Input Prices
Technology
Producer Expectations of the Market (will future prices/demand rise or fall)
Number of Producers

Question 15

What causes a movement along a supply curve?

Answer 15

A change in the price of an immediate (price determinant) good/service

Question 16

What causes a shift of a supply curve?

Answer 16

Any change in a determinant of supply (non-price determinant) changes the supply curve will shift

Question 17

What does dQs/dP tell us in regards to the supply curve? What are the 3 reasons we know this?

(a derivative of Qs in relation to P)

Answer 17

The derivative of the quantity demanded in regards to its price is always negative.

We know this because:

1. the Supply Curve is always upward sloping
2. the Law of Supply tells us that as price increases Qs also increases
3. P is our Y-Axis and Qd is our X-Axis and the slope of our demand curve is Δp/ΔQd and any + change to Δp causes a + change to ΔQs

Question 18

What is market equilibrium and what is an equilibrium price and quantity?

Answer 18

Market equilibrium is where no market participant wants to change their behavior (the intersection of the D and S curves. There is no excess demand or supply)

Equilibrium price = the price at which consumers want to buy the same quantity that consumers want to sell

Equilibrium quantity = the quantity that consumers buy and producers sell at the equilibrium price

Question 19

What does the function Qd = Qs tell us?

Answer 19

If Qd = Qs then the market is in equilibrium

Question 20

What happens to a market that has a price below equilibrium?

Answer 20

Consumers will demand more than suppliers are willing to produce driving the price back to a point where suppliers will produce, thus, achieving equilibrium

Question 21

What happens to a market that has a price above equilibrium?

Answer 21

Suppliers will produce more than consumers are willing to purchase driving the price down to a point where consumers will consume, thus, achieving equilibrium

Question 22

What does it mean when an economy has excess supply?

What will happen to the market if prices remain constant? If prices are free to move?

Answer 22

The amount of goods supplied in the market is greater than the amount demanded at that specific price

There will be a demand shortage/supply surplus at the given price. If prices are free to move the excess supply will drive prices down to equilibrium.

Question 23

What does it mean when an economy has excess demand?

What will happen to the market if prices remain constant? If prices are free to move?

Answer 23

The amount of goods demanded in the market is greater than the amount supplied at that specific price.

There will be a supply shortage/demand surplus at the given price. If the price is free to move the excess demand will push prices up to equilibrium

Question 24

What is another term for the market equilibrium price?

Answer 24

Market clearing price

Question 25

What is a comparative statistic (static equilibrium), and how is it measured?

Answer 25

The method used to analyze how variables controlled by consumers and firms react to changes in variables they cannot control.

It is measured by comparing a static equilibrium before an exogenous variable shock to the equilibrium after the shock

Question 26

What is an elasticity?

Answer 26

A percentage change in one variable in response to a given change in another variable

E = % change A / % change B

Question 27

What is the price elasticity of demand?

What is the basic elasticity of demand function?

What is the derivative of a demand function that gives us the elasticity?

Answer 27

The percentage change in quantity demanded in response to a given change in price

E = change Qd / Change P

E = -b(P/Q)

Question 28

If your demand elasticity is = 0, what does that tell you about the demand curve?

What does it tell us about prices in the market?

Answer 28

It tells us that the demand curve is perfectly inelastic (horizontal).

There are multiple substitutes for the product. Thus, any increase or or decrease in the market price will translate to all Qd lost

Question 29

If your demand elasticity is = 1, what does that tell you about the demand curve?

What does it tell us about prices in the market?

Answer 29

It tells us that the demand curve has perfect elasticity

There are no substitutes for the product. Thus, any increase or decrease in the market price will translate to no lost Qd

Question 30

What is the price elasticity of supply?

Answer 30

The percentage change in quantity supplied to the change in price

Question 31

If your supply elasticity is = 0, what does that tell you about the supply curve?

What does it tell us about prices in the market?

Answer 31

It tells us that the supply curve is perfectly inelastic (vertical)

That any increases to the market price does not change the overall supply

Question 32

If your supply elasticity is = 1, what does that tell you about the supply curve?

What does it tell us about prices in the market?

Answer 32

It tells us that the supply curve is perfectly elastic (horizontal)

That any increases to the market supply does not change the overall price