Market Forces of Supply and Demand Quiz

Supply and Demand

• A Supply Schedule is a table that shows the relationship between the price of a good and the quantity supplied, holding constant everything else that influences how much producers of the good want to sell.
• The Law of Supply states that, other things being equal, the quantity supplied of a good rises when the price of the good rises.
• A Supply Curve is a graph of the relationship between the price of a good and the quantity supplied.

Market Supply and Individual Supply

• Market Supply is the sum of the supplies of all sellers.
• Shifts in the Supply Curve occur when something happens to alter the quantity supplied at any given price.

Changes in Supply Curve

• An increase in supply shifts the supply curve to the right, and a decrease in supply shifts it to the left.
• Variables that can shift the supply curve include:
  • Input Prices
  • Technology
  • Expectations
  • Number of Sellers

Supply and Demand Equilibrium

• Supply and Demand Equilibrium is a situation in which the market price has reached the level at which quantity supplied equals quantity demanded.
• The point of equilibrium represents a theoretical state of rest where all economic transactions that ‘should’ occur, given the initial state of all relevant economic variables, have taken place.
• Equilibrium Price is the price that balances quantity supplied and quantity demanded.
• Equilibrium Quantity is the quantity supplied and the quantity demanded at the equilibrium price.

Disequilibrium

• Disequilibrium is a state within a market-based economy in which the economic forces of supply and demand are unbalanced.
• It can be caused by short-term changes in economic variables or due to long-term structural imbalances.

Surplus and Shortage

• Surplus is a situation in which the quantity supplied is greater than the quantity demanded.
• Shortage is a situation in which the quantity demanded is greater than the quantity supplied.

Government Intervention

• Price Floor: a price floor must be higher than the equilibrium price to be effective.
• Price Ceiling: a price ceiling must be lower than the equilibrium price to be effective.

Law of Supply and Demand

• The Law of Supply and Demand states that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

Three Steps to Analyzing Changes in Equilibrium

• Decide whether the event shifts the supply or demand curve.
• Decide in which direction the curve shifts.
• Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity.

Demand

• The quantity demanded of any good or service is the amount that buyers are willing and able to purchase.
• A Demand Schedule is a table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much of the good consumers want to buy.
• The Law of Demand states that, other things being equal, the quantity demanded of a good falls when the price of the good rises.
• Demand Curve is a graph of the relationship between the price of a good and the quantity demanded.

Market Demand and Individual Demand

• Market Demand is the sum of all the individual demands for a particular good or service.

Shifts in the Demand Curve

• If something happens to alter the quantity demanded at any given price, the demand curve shifts.
• Variables that can shift the demand curve include:
  • Income
  • Prices of Related Goods
  • Tastes
  • Expectations
  • Number of Buyers

Elasticity and Its Applications

• Elasticity is a measure of how much buyers and sellers respond to changes in market conditions.
• Price Elasticity of Demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
• Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price.
• Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.

General Rules on Determining the Price Elasticity of Demand

• Availability of close substitutes – goods with close substitutes tend to have more elastic demand.
• Necessities versus luxuries – necessities tend to have inelastic demands, whereas luxuries have elastic demands.
• Definition of the market – narrowly defined markets tend to have more elastic demand than broadly defined markets.
• Time horizon – goods tend to have more elastic demand over longer time horizons.