Economics: Law of Demand and Supply

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Questions and Answers

Which statement accurately describes the law of demand?

When the price increases, demand decreases. (correct)

When the price increases, demand increases.

When the price decreases, demand decreases.

When the price remains constant, demand decreases.

Which factor does NOT influence supply?

Changes in consumer tastes. (correct)

Changes in the cost and availability of inputs.

Changes in the number of producers.

Advances in technology.

What happens to the supply curve when market price increases?

The supply curve shifts to the left.

The supply curve shifts to the right.

The quantity supplied increases along the existing supply curve. (correct)

The supply curve remains unchanged.

Which of these prices could be the equilibrium price for gasoline in country A if international trade is allowed?

$3 Signup and view all the answers

What is the correct definition of producer surplus?

The difference between what producers are willing to accept and what they actually receive. Signup and view all the answers

Which shape represents a production possibilities frontier (PPF) that demonstrates increasing opportunity costs?

A concave curve. Signup and view all the answers

Which of the following statements about absolute and comparative advantage is incorrect?

Absolute advantage guarantees profit in international trade. Signup and view all the answers

If the law of supply states that supply increases as price increases, what happens to supply when prices fall?

Supply decreases. Signup and view all the answers

Which statement accurately describes the role of absolute and comparative advantages in international trade?

Both the absolute and comparative advantage can explain international trade Signup and view all the answers

What happens when a tax is imposed on a market?

When a tax is imposed, both consumers and producers pay for it Signup and view all the answers

Which of the following instruments can be effectively used to restrict imported goods or services?

All of the above Signup and view all the answers

What is true regarding trade barriers?

Trade barriers can create deadweight losses and economic inefficiencies Signup and view all the answers

What effect does imposing a quota on imported goods have?

Quota directly influences the price of the goods sold in the domestic market Signup and view all the answers

Which of the following best characterizes the impact of tariffs on domestic consumer surplus?

Tariff decreases domestic consumer surplus Signup and view all the answers

Which statement is accurate concerning the imposition of a tax in a market?

Taxes affect both consumers and producers through market price adjustments Signup and view all the answers

How does the domestic market price change with a $0.25 tariff per unit compared to free trade without trade barriers?

It increases Signup and view all the answers

What is the primary intention behind implementing export subsidies?

To encourage increased production and competitiveness in the international market Signup and view all the answers

What effect does a $0.25 tariff per unit have on imports compared to free trade without barriers?

Imports decrease Signup and view all the answers

Which of the following statements about the foreign exchange market is correct?

It is operational for a full day every day of the week Signup and view all the answers

Which statement about exchange rates is correct?

Exchange rates can vary over time due to supply and demand Signup and view all the answers

What commodity was used to establish convertibility for national currencies between the mid-1870s and 1914?

Gold Signup and view all the answers

Which of the following is a correct statement about the Bretton-Woods system?

It was created in a private corporate meeting Signup and view all the answers

Under the Bretton Woods agreement, if the exchange rate becomes 2.80 $/£, what is the potential action by the Bank of England?

Sell reserves to stabilize the exchange rate Signup and view all the answers

Which of the following describes an exchange rate correctly?

It reflects the relative value of currencies over time Signup and view all the answers

Study Notes

Law of Demand and Supply

When the price increases, the demand decreases
When the price increases, the supply increases

Factors That Influence Supply

Changes in the cost and availability of inputs
Advances in technology
Changes in the prices of related goods and services
Changes in the number of producers

Demand Curve

When the market price is $3 per gallon, the quantity demanded for gasoline is 5 gallons.
Consumer surplus is the difference between the amount consumers are willing to pay for a good and the amount they actually pay. At a market price of 2pergallon,consumersarewillingtopay2 per gallon, consumers are willing to pay 2pergallon,consumersarewillingtopay4 per gallon for the second gallon of gasoline. So the consumer surplus for the second gallon is 2(2 (2(4-$2).

Supply Curve

When the market price is $5 per gallon, the quantity supplied for gasoline is 7 gallons.
Producer surplus is the difference between the amount producers receive for a good and the amount it cost them to produce it. At a market price of 5pergallon,producersarewillingtosellthethirdgallonofgasolineat5 per gallon, producers are willing to sell the third gallon of gasoline at 5pergallon,producersarewillingtosellthethirdgallonofgasolineat3 per gallon. So the producer surplus for the third gallon is 2(2 (2(5-$3).

Equilibrium Market Price

The market price could be either 3or3 or 3or4 if international trade is allowed.

Production Possibilities Frontier

The figure can NOT be a straight line.
The figure can NOT be concave up (bowed out).

Absolute Advantage, Comparative Advantage, and International Trade

Only the comparative advantage can explain international trade.

Imposing a Tax

When a tax is imposed, both consumers and producers pay for it.

Instruments to Alter Trade Flows

Tariffs
Quotas
Voluntary export restraints

Trade Barriers

Trade barriers are second-best policy responses
Trade barriers can create deadweight losses and economic inefficiencies
Due to tariff, there is a decrease in domestic consumer surplus
Due to tariff, there is a decrease in domestic producer surplus

Imposing a Quota on Imported Goods

Quota directly influence the price of the goods sold in the domestic market

Market in a Small Country

Without trade, the equilibrium price is $4 per unit, and the equilibrium quantity is 4 units.
Under free trade without trade barriers, the domestic market price is $2 per unit, the amount of domestic quantity supplied is 1 unit, domestic quantity demanded is 6 units, and imports are 5 units.
After imposing a 0.25tariffperunit,thenewmarketpriceis0.25 tariff per unit, the new market price is 0.25tariffperunit,thenewmarketpriceis2.25 per unit.
Under $0.25 tariff, the domestic quantity supplied is 2 units, the domestic quantity demanded is 5 units, and imports are 3 units.
Compared to free trade without trade barrier, the domestic market price increases by 0.25afterimposinga0.25 after imposing a 0.25afterimposinga0.25 tariff per unit.
Compared to free trade without trade barrier, the imports decrease by 2 units after imposing a $0.25 tariff per unit.

Foreign Exchange Market

The foreign exchange market is a global market
The foreign exchange market is a twenty-four-hour market
The foreign exchange market is where people can trade currencies

Exchange Rate

Exchange rates can vary over time
A nominal exchange rate is adjusted for changes in the two nations' price levels
Exchange rates can change when the demand for or supply of a currency changes

Underlying Commodity to Establish Convertibility

Gold

Bretton-Woods System

The name came from the place where a conference was held
It established the dollar-standard exchange-rate system
It created the International Monetary Fund

Equilibrium Dollar-per-Pound Exchange Rate

The equilibrium exchange rate in this market is 2.50 $/£.
Under Bretton Woods agreement, if the exchange rate becomes 2.80 $/£, the quantity of pounds supplied is 4 million, and the quantity of pounds demanded is 3 million.
The Bank of England would buy 1 million pounds to keep the exchange rate at 2.80 $/£.

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Description

Explore the fundamental concepts of demand and supply in this quiz. Understand how price changes impact both consumer demand and producer supply. Learn about demand curves, supply curves, and market behavior through various scenarios.