(Week 2, Quiz 2 ) Economics Chapter on Demand and Supply

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Questions and Answers

What happens to quantity demanded when the price of a product falls?

It increases (correct)

It decreases

It fluctuates randomly

It remains unchanged

A shift of the demand curve indicates a change in the quantity demanded due to a change in price.

False

What is the relationship between price and quantity demanded according to the law of demand?

When price increases, quantity demanded decreases and vice versa.

A good for which the demand increases as income rises is known as a __________.

normal good Signup and view all the answers

Match the following concepts with their definitions:

Ceteris paribus = All other variables held constant Substitution effect = Change in quantity demanded due to relative price change Income effect = Change in quantity demanded due to change in purchasing power Market demand = Demand from all consumers of a product Signup and view all the answers

Which of the following is a variable that can shift market demand?

Income Signup and view all the answers

The demand curve always slopes upwards from left to right.

False Signup and view all the answers

What does the demand schedule illustrate?

The relationship between the price of a product and the quantity demanded. Signup and view all the answers

What happens to the demand for an inferior good when income rises?

It decreases Signup and view all the answers

Complements are goods that are used in conjunction with each other.

True Signup and view all the answers

What are the main factors that can shift the demand curve?

Prices of related goods, tastes, population and demographics, expected future prices. Signup and view all the answers

A _____ is a curve that shows the relationship between the price of a product and the quantity supplied.

supply curve Signup and view all the answers

Match the following terms with their definitions:

Substitutes = Goods that can be used for the same purpose Sunk Cost = A cost that cannot be recovered Endowment Effect = Reluctance to sell owned items Opportunity Cost = The value of the next best alternative given up Signup and view all the answers

Which of the following is NOT a variable that shifts supply?

Consumer income Signup and view all the answers

An increase in the price of a product will lead to a decrease in the quantity supplied.

False Signup and view all the answers

What is the definition of behavioral economics?

The study of situations where people act in economically irrational ways. Signup and view all the answers

If consumers expect prices to _____ in the future, they are incentivized to purchase more now.

increase Signup and view all the answers

Which of the following describes the 'law of supply'?

An increase in price causes an increase in quantity supplied Signup and view all the answers

Study Notes

Demand and Supply Concepts

Distinction between a movement along a demand/supply curve versus a shift of these curves.
The law of demand states that lower prices result in higher quantity demanded and vice versa, under the ceteris paribus condition.
Demand schedule illustrates the relationship between product price and quantity demanded.
Demand curve visually represents this relationship.

Law of Demand

Substitution Effect: Changes in quantity demanded due to price changes making products more/less expensive relative to substitutes.
Income Effect: Changes in quantity demanded resulting from price changes that affect consumer purchasing power.

Variables Shifting Market Demand

Income:
- Normal goods see increased demand with rising income.
- Inferior goods see increasing demand when income falls.
Prices of Related Goods:
- Substitutes can replace each other; complements are used together.
Tastes: Consumer preferences influenced by seasons and trends.
Population and Demographics: Population growth increases demand; demographic changes affect specific goods.
Expected Future Prices: Anticipation of price increases can lead to higher current demand.

Supply Concepts

Quantity supplied refers to the amount that firms are willing to supply at a stated price.
Supply schedule shows price-quantity supplied relationships; supply curve graphically represents these data.

Law of Supply

An increase in product price leads to an increase in quantity supplied and vice versa, holding everything else constant.

Variables Shifting Supply

Prices of Inputs: Cost changes for resources impact supply.
Technological Change: Advances can lead to increased efficiency and supply.
Prices of Substitutes in Production: Alternate goods can shift supply dynamics.
Number of Firms: More firms typically increase market supply.
Expected Future Prices: Anticipated price changes can prompt adjustments in current supply.

Market Equilibrium

Surpluses occur when supply exceeds demand, leading to price drops.
Shortages occur when demand exceeds supply, causing prices to rise.
An increase in supply can lower equilibrium prices, while increased demand can raise equilibrium prices.

Behavioral Economics

Investigates irrational decision-making by consumers, often ignoring non-monetary opportunity costs, failing to account for sunk costs, and being overly optimistic about future actions.

Key Behavioral Concepts

Opportunity Cost: The best alternative foregone when making choices.
Endowment Effect: Disinclination to sell owned goods at prices higher than willingness to pay if not owned.
Sunk Costs: Irrecoverable costs that should not influence future decisions.

Production Possibility Frontier (PPF)

Depicts the maximum efficient production of two goods.
Points inside the curve represent inefficient use of resources; scarcity reflects the imbalance between limited resources and unlimited wants.
Absolute Advantage focuses on total output efficiencies.
Comparative Advantage considers opportunity costs to determine who can produce efficiently.

Currency Impact on Production

A weaker currency typically improves production competitiveness.
A stronger currency can lead to decreased production efficiency.

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Description

Explore the key concepts of demand and supply in this quiz. Differentiate between movements along and shifts of the demand and supply curves, and understand how these changes impact market equilibrium, price, and quantity. Test your knowledge of the law of demand, including substitution and income effects.