Economics Chapter 2: Demand and Supply

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Questions and Answers

What happens to demand for normal products when consumer incomes increase?

Demand is unaffected by income changes

Demand decreases

Demand remains unchanged

Demand increases (correct)

How does an increase in the price of a substitute product affect its related substitute?

Unpredictable impact on demand

Has no effect on the substitute

Increases demand for the substitute (correct)

Decreases demand for the substitute

Which determinant of demand is affected by whether consumers believe prices will rise in the future?

Expectations of future prices (correct)

Consumer incomes

Consumer preferences

Prices of related products

Which statement is true regarding inferior products?

Demand decreases when income rises Signup and view all the answers

What is the effect of an increase in consumer preferences for a product?

Demand increases Signup and view all the answers

What is true about complements in terms of price changes?

Increased price of one usually decreases demand for its complement Signup and view all the answers

What factors can lead to an increase in demand due to consumer expectations?

Expectations of rising prices or scarcity Signup and view all the answers

Which determinant of demand is primarily impacted by the prices of related products?

Prices of related products Signup and view all the answers

What is likely to happen if the price of a complementary product like beer falls?

Demand for pretzels increases. Signup and view all the answers

What happens to the market for pretzels when the demand increases?

Shortage is created. Signup and view all the answers

If the price of nuts rises, what is the expected impact on the demand for pretzels?

Demand for pretzels increases. Signup and view all the answers

In the context of market demand, what does a surplus indicate?

Demand has decreased. Signup and view all the answers

When demand for a product decreases, what is the primary effect on price?

Price will likely decrease. Signup and view all the answers

If the quantity traded of beer decreases, what is likely to happen to the demand for pretzels?

Demand for pretzels may decrease depending on consumer preferences. Signup and view all the answers

Which statement best describes the change from D1 to D2 in the demand graph?

Demand increased, leading to a higher price. Signup and view all the answers

What is the likely scenario if income distribution becomes more equal in a community?

Demand for basic necessities will increase. Signup and view all the answers

What is the effect called when a change in price changes a consumer's ability to purchase goods and services?

Income effect Signup and view all the answers

Which term describes the decrease in quantity demanded due to the rise in price of a product, prompting consumers to switch to alternatives?

Substitution effect Signup and view all the answers

How is market demand defined?

The total demand for a product or service by all consumers Signup and view all the answers

If prices of a product increase, what will typically happen to the quantity demanded, assuming all other factors remain constant?

It will decrease Signup and view all the answers

Which of the following values represents the total market demand for soy milk at a price of $20, based on the given schedule?

16 Signup and view all the answers

What is the characteristic of the demand curve related to the income effect?

It slopes downward as real income increases Signup and view all the answers

In the demand schedule for soy milk, what does the term 'horizontal summation' refer to?

The combination of all individual demands at each price point Signup and view all the answers

What happens to real income when prices decrease?

Real income increases Signup and view all the answers

What occurs when there is a surplus in the market?

Producers drop the price to sell excess stock. Signup and view all the answers

At what price does market equilibrium occur based on the provided demand and supply data?

$3.50 Signup and view all the answers

What happens to quantity supplied when there is a shortage?

It increases. Signup and view all the answers

What is the shortage at a price of $2.50?

30 units Signup and view all the answers

Which of the following accurately describes the market adjustments resulting from a surplus?

Sellers drop the price to sell excess stock. Signup and view all the answers

What occurs at market equilibrium?

Quantity demanded equals quantity supplied. Signup and view all the answers

What is the relationship between price and quantity demanded in the event of a surplus?

Price decreases, quantity demanded increases. Signup and view all the answers

What happens when the price is set above the equilibrium price?

There is a surplus of goods. Signup and view all the answers

How does a buyer's behavior change when there is a shortage?

Buyers bid up the price. Signup and view all the answers

What quantity would sellers supply at a price of $4.00?

54 units Signup and view all the answers

What defines a surplus in the market?

The amount by which quantity supplied is greater than quantity demanded. Signup and view all the answers

At what price will the market quantity supplied equal the market quantity demanded in the provided table?

$20 Signup and view all the answers

What is the primary factor that results in a change in demand?

Change in consumer preferences. Signup and view all the answers

Which scenario describes a shortage in the market?

At $18, the quantity demanded is 22, and quantity supplied is 8. Signup and view all the answers

What is indicated when the quantity demanded equals the quantity supplied?

The market is in equilibrium. Signup and view all the answers

If the price is lowered to $19, what will happen to the market?

There will be a shortage of 6 units. Signup and view all the answers

Which option accurately states the relationship at equilibrium?

QD = QS, resulting in a stable market. Signup and view all the answers

What characterizes the scenario when the market price is set too low?

There is a shortage. Signup and view all the answers

What is generally true for prices set below equilibrium?

Sellers cannot meet demand fully. Signup and view all the answers

What is the effect of an improvement in technology on production costs?

It leads to a fall in production costs. Signup and view all the answers

What happens to the supply of a product when the price of its substitute in production increases?

The supply decreases. Signup and view all the answers

What will likely happen if suppliers expect lower future prices?

Supply will increase. Signup and view all the answers

How does a decrease in the number of suppliers affect market supply?

It reduces market supply. Signup and view all the answers

What occurs in the market when there is an increase in supply?

A surplus is created and price falls. Signup and view all the answers

If supply decreases, what is the expected market consequence?

A shortage is created and price rises. Signup and view all the answers

At what point do demand and supply curves intersect?

At the equilibrium price. Signup and view all the answers

What indicates a new equilibrium after a supply increase?

Decrease in price and increase in quantity. Signup and view all the answers

Study Notes

Chapter 2: Demand and Supply: An Introduction

This chapter introduces the concepts of demand, supply, market, and equilibrium.
Learning objectives include explaining the concept of demand, supply, the market, and equilibrium.
Demonstrating the causes and effects of a change in demand and supply.
Explaining why demand and supply determine price and quantity traded.

LO1: Demand

Demand refers to the quantities consumers are willing and able to buy at different prices.
Price is the most critical determinant.
Demand involves both the desire and the ability of consumers to purchase.
It assumes other things remain constant (ceteris paribus).
Demand refers to a range of prices and measures quantities over time.

Demand Important Points

Demand is a schedule showing the various quantities demanded per period at different prices.
The demand curve is a graphic representation of the demand schedule.

Demand Schedule Example

Table 2.1 shows an individual demand schedule for cases of a product at various prices.
At a price of $17, the quantity demanded is 7 cases per month.
At $18, the quantity demanded is 6 cases. And so on.

Demand Curve

The demand curve is a graph showing the relationship between quantity demanded and price.
It slopes downwards: as price increases, quantity demanded decreases (and vice-versa).

Why the Demand Curve Slopes Downward

Income effect: A price change affects real income; lower prices mean higher real income, increasing the quantity demanded.
Substitution effect: Consumers substitute cheaper goods for more expensive ones.

Market Demand

Market demand is the combined demand of all consumers for a product or service.
A market demand schedule shows the market demand at different prices; e.g. Table 2.2.
Market demand is the horizontal summation of individual demand curves.

LO2: Supply

Supply refers to the quantities producers are willing and able to supply at different prices.

Supply Schedule

A table showing the various quantities supplied per period at different prices, such as table 2.3.

Supply Curve

The supply curve graph shows the relationship between quantity supplied and price (slopes upwards).
As price increases, quantity supplied increases (vice-versa).

Why the Supply Curve Slopes Upward

Producers are motivated by profit. Higher prices mean greater profit, leading to more production.
Costs increase as production increases, so higher prices are required to motivate increased supply.

Market Supply

Market supply is the total supply from all producers of a product.
It's the horizontal summation of each individual producer’s supply curve.

Assumptions

All producers are making a similar product
Consumers have no preference among producers

LO3: The Market

A market is a mechanism allowing buyers and sellers to exchange goods/services.

LO4: Market Equilibrium

The point where quantity demanded equals quantity supplied.
There's neither a shortage nor surplus.

Surplus

Occurs when quantity supplied exceeds quantity demanded (at a price above equilibrium).

Shortage

Occurs when quantity demanded exceeds quantity supplied (at a price below equilibrium). Example: Table 2.5 and 2.6.

Market Adjustments

A surplus results in lower prices and increased demand (eventually reaching equilibrium).
A shortage results in higher prices and reduced demand (eventually reaching equilibrium).

LO5: Change in Demand

A change in demand is when the quantity demanded at each price changes.
This is due to a factor other than price, e.g. consumer preferences, income, or prices of related goods (substitutes and complements).
Increase in demand means the demand curve shifts up/right.
A decrease in demand means the demand curve shifts down/left.

Determinants of Demand

Consumer preferences (tastes). If tastes change, demand changes.
Consumer incomes.
Prices of related products (substitutes and complements).
Expectations of future prices, income, or availability.
Population size or income/age distribution.

LO6: Change in Supply

A change in supply occurs when the quantity supplied at each price changes, due to a factor besides price.
Increase in supply: supply curve shifts right/downward.
Decrease in supply: supply curve shifts left/upward.

Determinants of Supply

Prices of productive resources. If resource prices rise, supply decreases.
Government taxes and subsidies. Taxes reduce supply; subsidies increase supply.
Technology. Improvements in tech increase supply.
Prices of substitute products in production. An increase in price for a substitute product in production will decrease supply.
Future expectation of suppliers. Lower expected future prices will lead to increased supply.
Number of suppliers. More suppliers usually mean increased supply.

LO7: Final Words

Demand and supply determine price and quantity (not the other way around).
A change in demand causes a shortage or surplus and a change in price and quantity.
A change in supply causes a shortage or surplus and a change in price and quantity.

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Description

This quiz covers the fundamental concepts of demand and supply as introduced in Chapter 2 of your economics textbook. You will learn about the relationship between price, quantity, and market equilibrium, as well as how changes in demand and supply affect prices. Explore key terms and their implications in market dynamics.