Economics Demand Concepts Quiz

Demand

• The relationship between price and the quantity consumers are willing and able to buy over a fixed time period, ceteris paribus (all else held constant).
• Quantity demanded is the specific amount consumers are willing and able to buy at a given price.

Law of Demand

• As the price of a good or service increases, the quantity demanded decreases, ceteris paribus.
• This occurs because of the income effect, the substitution effect, and diminishing marginal utility.
• Income Effect: Higher prices reduce purchasing power.
• Substitution Effect: Lower prices of substitutes compared to the higher priced good lead to more consumers choosing the substitutes.
• Diminishing Marginal Utility: Each additional unit consumed provides less benefit.

Market Demand

• The sum of all individual quantities demanded at each price over a fixed time period, ceteris paribus.

Change in Demand vs. Change in Quantity Demanded

• A change in quantity demanded is a movement along the demand curve due to a change in price.
• A shift in demand is a change in the quantity demanded at every price.

Demand Shifters

• Change in Income:
  • Normal goods: Demand increases as income increases.
  • Inferior goods: Demand decreases as income increases.
• Tastes and Preferences: Changes in perception of desirability affect demand.
• Number of Buyers: More buyers mean higher market demand.
• Expectations: Anticipated price increases can lead to increased demand today.
• Price of Related Goods:
  • Substitutes: A decrease in the price of substitutes decreases the demand for the good.
  • Complements: A decrease in the price of complements increases the demand for the good.

Supply

• The relationship between the price of a good or service, and the quantities producers are willing and able to sell over a fixed time period, ceteris paribus.
• Quantity supplied is the specific amount of good or service a producer is willing and able to sell at a given price.

Law of Supply

• As the price of a good or service increases, the quantity supplied increases, ceteris paribus.
• This is driven by diminishing marginal productivity.
• Diminishing Marginal Productivity: When at least one input of production is fixed, the marginal productivity of additional variable resources decreases.

Market Supply

• The sum of all individual quantities supplied at each price over a fixed time period, ceteris paribus.

Change in Supply vs. Change in Quantity Supplied

• A change in quantity supplied is a movement along the supply curve due to a change in price.
• A shift in supply is a change in the quantity supplied at every price.

Supply Shifters

• Subsidies and Taxes:
  • Subsidies increase supply.
  • Taxes decrease supply.
• Resource Costs and Technology:
  • Increased resource costs decrease supply.
  • Positive technological changes increase supply.
• Number of Sellers: More sellers mean higher market supply.
• Expectations: Anticipated price increases can lead to decreasing supply today.

Market Equilibrium

• Equilibrium Price (Pe): The price at which the quantity supplied equals the quantity demanded.
• Equilibrium Quantity (Qe): The quantity traded when the quantity supplied equals the quantity demanded.

Shortage and Surplus

• Shortage: Quantity demanded greater than quantity supplied.
• Surplus: Quantity supplied greater than quantity demanded.

Price Controls:

• Price Ceiling: A maximum legal price at which a good or service can be sold.
  • A price ceiling set below the equilibrium price is binding and creates a shortage due to excess demand.
  • A price ceiling set above the equilibrium price is nonbinding and has no effect on the market.
• Price Floor: A minimum legal price at which a good or service can be sold.
  • A price floor set above the equilibrium price is binding and creates a surplus due to excess supply.
  • A price floor set below the equilibrium price is nonbinding and has no effect on the market.

Taxes:

• Excise Tax: A tax based on the number of units purchased, not on the price paid for a good or service.
  • The producer receives a lower price after paying the tax to the government.
  • The consumer pays a higher price.
  • The government collects the difference between the consumer price and producer price for each unit.

Demand and Quantity Demanded

• Demand represents the relationship between a good's price and the amount consumers willingly purchase, considering all other factors constant.
• Quantity Demanded refers to the specific amount of a good or service consumers are willing to buy at a given price.

Law of Demand

• The Law of Demand dictates that as the price of a good rises, the quantity demanded decreases, assuming all other factors remain constant.
• This is due to the Income Effect: as prices increase, purchasing power diminishes.
• The Substitution Effect also plays a role: consumers turn to less expensive substitutes when a good becomes costlier.
• Lastly, the Diminishing Marginal Utility principle suggests that the benefit of consuming additional units of a good decreases, leading to lower demand at higher prices.

Market Demand

• Market Demand is the total quantity demanded by all consumers at different prices, considering all other factors constant.

Changes in Demand

• Movement along a demand curve occurs when a price change causes a change in the quantity demanded.
• Shift in demand occurs when a factor besides price influences the quantity demanded at all price levels.

Demand Shifters

• Income changes influence demand for normal goods (positive relationship) and inferior goods (negative relationship).
• Tastes and preferences can increase demand for a good if its desirability rises.
• Number of buyers in the market directly affects total demand.
• Expectations about future prices can impact present demand, as consumers may buy more if they anticipate higher prices in the future.
• Prices of related goods influence demand: cheaper substitutes reduce demand, while cheaper complements increase demand.

Supply and Quantity Supplied

• Supply refers to the relationship between a good's price and the amount producers are willing to sell, considering all other factors constant.
• Quantity Supplied is the specific amount of a good or service producers are willing to offer at a given price.

Law of Supply

• The Law of Supply states that as the price of a good rises, the quantity supplied increases, assuming all other factors remain constant.
• This is due to the Diminishing Marginal Productivity principle: as more resources are used to produce additional units, the output per unit of additional resources decreases.

Market Supply

• Market Supply represents the total quantity supplied by all producers at different prices, considering all other factors constant.

Changes in Supply

• Movement along a supply curve occurs when a price change causes a change in the quantity supplied.
• Shift in supply occurs when a factor besides price influences the quantity supplied at all price levels.

Supply Shifters

• Subsidies and taxes impact supply: subsidies increase it, while taxes decrease it.
• Resource costs and technology affect supply: rising resource costs reduce supply, while technological advancements increase it.
• Number of sellers directly influences market supply.
• Expectations about future prices can influence present supply: producers may hold onto goods if they expect higher prices later.

Market Equilibrium

• Equilibrium Price (Pe) is the price where quantity supplied equals quantity demanded.
• Equilibrium Quantity (Qe) is the quantity traded when quantity supplied equals quantity demanded.

Shortage and Surplus

• Shortage occurs when quantity demanded exceeds quantity supplied.
• Surplus occurs when quantity supplied exceeds quantity demanded.

Price Ceiling and Price Floor

• Price Ceiling is a legal maximum price for selling a good.
• Price Floor is a legal minimum price for selling a good.

Taxes on Producers and Consumers

• Excise tax is a tax based on units purchased, not price.
• It affects prices paid by consumers (Pb) and received by producers (Ps), with the government collecting the difference (Pb - Ps).
• Taxes on consumers also affect prices paid and received, with the burden of the tax partly borne by consumers and producers.

Demand

• Demand is the relationship between a good or service's price and the quantity consumers are willing and able to buy over a given time, holding all else constant.
• Quantity Demanded refers to the specific amount of a good or service consumers are willing and able to buy at a particular price point.

Law of Demand

• States that as the price of a good or service increases, the quantity demanded decreases, all else being equal.

Reasons Behind the Law of Demand

• Income Effect: As the price rises, consumers' purchasing power decreases, leading to a reduced demand for the product.
• Substitution Effect: When prices rise, consumers may shift to more affordable substitutes.
• Diminishing Marginal Utility: The satisfaction derived from consuming additional units of a good generally declines, leading to a lower willingness to buy more at higher prices.

Market Demand

• A market's total demand for a product is calculated by adding up the quantities demanded by all individuals at each price point.

Change in Demand vs. Change in Quantity Demanded

• A change in the quantity demanded occurs when there is a shift along the demand curve due to a change in the price of the good or service.
• A shift in demand occurs when there is a change in the quantity demanded at every price level. This is caused by factors other than price, known as demand shifters.

Demand Shifters

• Change in Income:
  • Normal good: Demand increases as income rises.
  • Inferior good: Demand decreases as income rises.
• Tastes and Preferences: Increased desirability of a product leads to increased demand.
• Number of Buyers: More buyers in the market result in a higher market demand.
• Expectations: If consumers anticipate a higher price in the future, they might buy more today.
• Price of Related Goods:
  • Substitute good: A decrease in the price of a substitute good reduces demand for the original good.
  • Complement good: A decrease in the price of a complement good increases demand for the original good.

Supply

• Similar to demand, supply is the relationship between the price of a good or service and the quantities producers are willing and able to sell over a period, holding all else constant.
• Quantity Supplied is the specific quantity of a good or service producers are willing and able to sell at a given price.

Law of Supply

• States that as the price of a good or service increases, the quantity suppliers are willing to sell also increases, all else being equal.

Reason Behind the Law of Supply

• Diminishing Marginal Productivity: When at least one input of production is fixed, the output gained from using additional units of a variable resource will eventually decline.

Market Supply

• Market supply is the total quantity of a good or service that all producers are willing to sell at each price point.

Change in Supply vs. Change in Quantity Supplied

• A change in quantity supplied is a movement along the supply curve due to a change in the price of the good or service.
• A shift in supply occurs when there is a change in the quantity supplied at every price level. This is caused by factors other than the price, known as supply shifters.

Supply Shifters

• Subsidies and Taxes to Producers:
  • Subsidies: Government subsidies for producers increase supply.
  • Taxes: Taxes on producers reduce supply.
• Resource Costs and Technology:
  • Resource Costs: Increased resource costs decrease supply.
  • Technology: Positive changes in technology increase supply.
• Number of Sellers: An increase in the number of sellers in the market increases market supply.
• Expectations: Producers who anticipate higher prices in the future might reduce their current supply to sell at those higher prices.

Market Equilibrium

• Equilibrium Price (Pe): The price where the quantity supplied equals the quantity demanded.
• Equilibrium Quantity (Qe): The quantity traded when the quantity supplied equals the quantity demanded.

Shortage

• Shortage: Quantity demanded exceeds quantity supplied.

Surplus

• Surplus: Quantity supplied exceeds quantity demanded.

Price Ceiling

• Price Ceiling: A maximum legal price that can be charged for a good or service.
  • Non-binding Price Ceiling: A price ceiling set above the equilibrium price has no impact on the market.
  • Binding Price Ceiling: A price ceiling set below the equilibrium price will create a shortage.

Price Floor

• Price Floor: A minimum legal price that can be charged for a good or service.
  • Non-binding Price Floor: A price floor set below the equilibrium price has no impact on the market.
  • Binding Price Floor: A price floor set above the equilibrium price will create a surplus.

Tax on Producers

• Excise Tax: A tax based on the number of units purchased, not on the price paid for a good or service.
  • Producers receive a lower price (Ps) after paying the tax to the government, while consumers pay the higher price (Pb).

Tax on Consumers

• Similar to the tax on producers, a tax on consumers will have the same impact on the market, but consumers will bear the cost of the tax.

Test your understanding of key demand concepts, including the law of demand, market demand, and the effects of price changes on quantity demanded. This quiz covers essential terms and principles that are critical for grasping consumer behavior in economics.