Economics Supply and Demand Quiz

Market Demand and Supply

• Market: The process of buyers and sellers exchanging goods and services. Examples include supermarkets, online stores, and restaurants.
• Demand Side: Buyers determine the demand side of the market, whether it's consumers purchasing goods or businesses buying resources.
• Supply Side: Sellers determine the supply side, whether it's producers selling goods or resource owners.
• Market prices and output are determined by the interactions of buyers and sellers through the forces of demand and supply.
• Demand: The willingness and ability of buyers to purchase different quantities of goods and services at various prices during a specific time.

Learning Objectives for the Topic

• Market Demand (Week 3)
• Market Supply (Week 4)

Demand

• Definition of demand: The willingness and ability of buyers to purchase different quantities of goods & services at various prices during a specific time period.
• Law of Demand: When the price of a good or service falls, quantity demanded increases (and vice versa). This is an inverse relationship, assuming all else is equal.
• Demand schedule: A table showing the quantity demanded of a good at various prices.
• Demand curve: A graphical representation of a demand schedule, usually showing price on the vertical axis and quantity demanded on the horizontal axis. The curve slopes downwards.
• Individual demand vs market demand: Market demand is the sum of all individual demands at each price.

Reasons for Downward Sloping Demand Curves

• Observed Behavior: Consumers generally buy more at lower prices.
• Diminishing Marginal Utility: Each additional unit of a good tends to provide less satisfaction to the consumer.
• Substitution Effect and Income Effects: Price rises for one good (e.g. Pizza Hut) encourages customers to substitute to another (e.g. Domino's) and/or increase their purchasing power for other goods if prices fall.

Determinants of Demand

• Prices of related goods (substitutes/complements): A rise in the price of a substitute good increases the demand for the original good, and vice versa; a rise in the price of a complementary good decreases the demand for the original good, and vice versa.
• Incomes of demanders (normal/inferior goods): Normal goods see higher demand with increased income; inferior goods see lower demand.
• Number of demanders/buyers: More potential buyers increases the overall demand.
• Taste and preferences: Shifting tastes or preferences for a good impact demand (e.g., trends).
• Expectations of demanders: Expectations about future price changes affect current demand.
• A change in price causes a movement along the demand curve.
• All other factors (non-price determinants) cause a shift of the demand curve.

Supply

• Definition of supply: The willingness and ability of sellers to offer differing quantities of a good or service at differing prices during a specific time.
• Law of Supply: When the price of a good or service increases, quantity supplied increases; when price decreases, quantity supplied decreases. The relationship is positive.

Determinants of Supply

• Input prices: Higher input costs reduce supply, lower input costs increase supply.
• Prices of related products: When the competing product's price rises, supply of the original item decreases.
• Expectations: If the price is expected to be higher in the future, supply will decrease now. If expected to be lower it increases.
• Number of suppliers: More suppliers increase supply.
• Technology: Advancements in technology increase productivity and, thus, supply.
• Government regulations: Regulations that increase costs reduce supply; those that decrease costs increase supply.
• Weather: Good weather often increases supply, while bad weather reduces it.

Market Equilibrium

• Equilibrium: The point where the supply and demand curves intersect.
• Equilibrium price: The price at the intersection of the supply and demand curves, where quantity supplied equals quantity demanded.
• Equilibrium quantity: The quantity exchanged at the market's equilibrium price.
• Shortage: occurs when quantity demanded exceeds quantity supplied at a given price (price below equilibrium).
• Surplus: occurs when quantity supplied exceeds quantity demanded at a given price (price above equilibrium).

Changes in Equilibrium

• Events that change demand and/or supply cause shifts in the equilibrium. Determine (1) which curves are affected and (2) direction of the shifts to identify the likely changes in equilibrium price & quantity.