Economics Chapter 1: Demand and Supply

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What does an increase in demand represent on a demand curve?

A rightward shift in the curve (correct)

A leftward shift in the curve

A movement along the same curve

No change in the demand curve

Which factor does NOT cause the demand curve to shift?

Changes in consumer preferences

Expectations of future prices

Income changes

Changes in production costs (correct)

How does a rise in income affect the demand for a normal good?

Demand remains constant

Demand decreases

Demand increases (correct)

Demand fluctuates unpredictably

What happens to the demand for a substitute good when the price of the other good rises?

Demand for the substitute increases Signup and view all the answers

What effect does preference for a good have on its demand curve?

Shifts the curve leftward if preference declines Signup and view all the answers

What best describes the law of demand?

Quantity demanded falls as price rises. Signup and view all the answers

Which of the following correctly represents the relationship defined by the law of demand?

Inverse relationship between price and quantity demanded. Signup and view all the answers

What is a demand curve?

A graphical representation showing the inverse relationship between price and quantity demanded. Signup and view all the answers

Why do individuals buy larger quantities of a good only at lower prices?

Because of the law of diminishing marginal utility. Signup and view all the answers

What distinguishes an individual demand curve from a market demand curve?

A market demand curve combines the quantities demanded by all buyers. Signup and view all the answers

What causes people to substitute lower priced goods for higher priced ones?

The law of diminishing marginal utility. Signup and view all the answers

During which situation would the quantity demanded for a good increase?

When the price of the good itself falls. Signup and view all the answers

What is one of the reasons for the inverse relationship between price and quantity demanded?

Marginal utility decreases with additional units consumed. Signup and view all the answers

What happens to the demand for a good if the price of its complement decreases?

Demand for the good increases. Signup and view all the answers

Which factor would cause the supply curve to shift to the right?

Advance in technology. Signup and view all the answers

According to the law of supply, what is the relationship between the price of a good and the quantity supplied?

They are directly related. Signup and view all the answers

What would likely occur if there is a sudden increase in the number of buyers in a market?

Demand would increase. Signup and view all the answers

What effect does an increase in the price of resources have on the supply of a good?

Supply decreases. Signup and view all the answers

What best describes a supply schedule?

A table showing the quantity supplied at various prices. Signup and view all the answers

Which of the following is NOT a factor that can shift the supply curve?

Changes in consumer preferences. Signup and view all the answers

Why is the supply curve generally upward sloping?

Higher prices provide incentive for sellers to increase production. Signup and view all the answers

Study Notes

Market Overview

Markets consist of two sides: the buying side (demand) and the selling side (supply).
Demand refers to the willingness and ability of buyers to purchase varying quantities of a good at different prices within a specified time frame.

Law of Demand

Price and quantity demanded have an inverse relationship: as price rises, quantity demanded falls; as price falls, quantity demanded rises, ceteris paribus.
Quantity demanded is determined at a specific price during a set time period.

Representation of Law of Demand

Verbal description.
Symbolic representation (P and Q variables).
Demand schedule: a numerical table displaying quantity demanded at various prices.
Demand curve: a graphical depiction illustrating the inverse relationship between price and quantity demanded.

Inverse Relationship of Demand

Substitution effect: consumers replace higher-priced goods with lower-priced alternatives.
Law of diminishing marginal utility: satisfaction gained from consuming successive units of a good declines, influencing willingness to pay higher prices for goods that provide more utility.

Demand Curves

Individual demand curve: reflects price-quantity relationship for a single buyer.
Market demand curve: represents price-quantity combinations from all buyers in the market.

Changes in Demand

Change in Quantity Demanded: movement along the demand curve due to price changes.
Change in Demand: shift of the demand curve caused by non-price factors.
- Increase in demand: rightward shift, indicating more willingness to purchase at all price levels.
- Decrease in demand: leftward shift, indicating reduced willingness to purchase at all price levels.

Factors Causing Demand Shifts

Income: Demand can increase or decrease based on income shifts affecting normal, inferior, or neutral goods.
Preferences: Positive changes in preferences shift demand rightward; negative changes shift it leftward.
Prices of Related Goods:
- Substitutes: Demand increases for one good when the price of a substitute rises.
- Complements: Demand increases for one good when the price of a complementary good falls.
Number of Buyers: More buyers lead to higher demand; fewer buyers reduce demand.
Expectations of Future Prices: Anticipating price increases boosts current demand, while expectations of price falls may reduce it.

Supply Overview

Supply refers to the willingness and ability of sellers to produce and offer goods at varying prices within a set time frame.

Law of Supply

Price and quantity supplied have a direct relationship: as price rises, quantity supplied increases; as price falls, quantity supplied decreases, ceteris paribus.

Characteristics of Supply

Quantity supplied is the amount producers are willing to sell at a given price.
Upward-sloping supply curve reflects the law of supply.

Reasons for Upward-Sloping Supply

Law of diminishing marginal returns: as production increases, the cost of additional units typically rises.
Higher prices tend to incentivize higher profit margins encouraging production.

Supply Schedule

A numerical list of quantities supplied at various prices.

Changes in Supply

Increase in supply: suppliers are willing to produce more at all price levels.
Decrease in supply: suppliers produce less at all price levels.

Factors Causing Supply Shifts

Prices of Relevant Resources: Increased costs lead to decreased supply.
Technology: Technological advancements can lower production costs and increase output.
Prices of Other Goods: Impact supply based on competitive production.
Number of Sellers: More sellers increase overall supply, fewer sellers reduce it.
Expectations of Future Prices: Anticipated price increases can lead to reduced current supply.
Taxes and Subsidies: Taxes generally decrease supply, while subsidies typically increase it.
Government Restrictions: Regulations can limit the ability to supply goods.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz covers key concepts in the law of demand, including its relationship with price and quantity. It also explores representations of demand through schedules and curves, as well as the effects of substitution and diminishing marginal utility. Test your understanding of these foundational economic principles.