Microeconomics: Supply and Demand Basics

Questions and Answers

What defines a competitive market?

A small number of buyers and sellers

Many buyers and sellers, each with a negligible impact on the market (correct)

Many buyers and sellers with significant market influence

A single seller controlling the market price

What is the relationship described by the law of demand?

Quantity demanded increases as price increases

Quantity demanded is independent of price changes

Quantity demanded falls when price rises (correct)

Quantity demanded rises when income increases

How is market demand calculated?

By subtracting individual demands from the total supply

By taking the average of individual demands for a good

By evaluating the highest individual demand in the market

By summing all individual demands for a good or service (correct)

What is the correct representation of a demand curve?

Price on the y-axis and Quantity on the x-axis Signup and view all the answers

In terms of demand, what does an increase in demand refer to?

A shift to the right of the demand curve Signup and view all the answers

What is meant by 'price takers' in a perfectly competitive market?

Neither buyers nor sellers can affect the market price Signup and view all the answers

What best describes 'quantity demanded'?

The amount buyers are willing to purchase at a specific price Signup and view all the answers

What effect does an increase in the price of one good have on the demand for its complement?

It decreases the demand for the complement. Signup and view all the answers

How is a change in consumer tastes likely to impact the demand curve?

It shifts the demand curve to the right. Signup and view all the answers

What happens to current demand when people expect an increase in income?

Current demand increases. Signup and view all the answers

What does the law of supply state?

Quantity supplied rises when price rises. Signup and view all the answers

What is a supply schedule?

A table showing the relationship between price and quantity supplied. Signup and view all the answers

What is the market supply curve?

The aggregate of all individual supply curves horizontally. Signup and view all the answers

When the price of a good falls, how does that influence the quantity supplied?

The quantity supplied decreases. Signup and view all the answers

What does individual supply refer to?

The amount of a good a single seller is willing to sell. Signup and view all the answers

How is the market demand curve determined?

By summing individual demand for a good or service Signup and view all the answers

Which factor does NOT cause a shift in the demand curve?

Improvements in technology Signup and view all the answers

What happens to the demand curve when there is an increase in the number of buyers?

The demand curve shifts to the right Signup and view all the answers

What is a normal good?

A good for which demand increases when income rises Signup and view all the answers

Which statement about inferior goods is correct?

They are goods consumed less as income increases Signup and view all the answers

What impact does a price increase for one good have on the demand for a substitute good?

It increases the demand for the substitute good Signup and view all the answers

When the demand curve shifts to the left, it indicates that the demand for the good is:

Decreasing Signup and view all the answers

Non-price determinants of demand do NOT include which of the following?

Price of the good itself Signup and view all the answers

What is shown by the supply curve?

How price affects quantity supplied, other things being equal Signup and view all the answers

Which of the following factors can cause a shift in the supply curve?

Technology changes Signup and view all the answers

What happens when input prices fall?

Firms supply a larger quantity at each price Signup and view all the answers

A cost-changing technological improvement affects the supply curve how?

Shifts the supply curve to the right Signup and view all the answers

How does a decrease in the number of sellers affect the supply curve?

The supply curve shifts to the left Signup and view all the answers

What occurs in a market experiencing a surplus?

Quantity supplied is greater than quantity demanded Signup and view all the answers

When sellers expect future prices to increase, what is their likely action?

Hold back inventory to sell later at higher prices Signup and view all the answers

In equilibrium, what is true of price?

It equals the quantity supplied Signup and view all the answers

Study Notes

Markets and Competition

A market consists of buyers and sellers of a good or service.
Buyers drive the demand, while sellers establish the supply.
Competitive markets have many buyers and sellers, each with a negligible impact on overall market conditions.
In a perfectly competitive market, goods are identical, and participants are price takers, meaning no single buyer or seller influences the market price.

Demand

Quantity demanded refers to how much of a good buyers are willing to purchase at a specific price.
The Law of Demand states that as a product's price increases, its quantity demanded decreases, and vice versa, assuming all else remains equal.
A demand schedule is a table that depicts the relationship between a product's price and quantity demanded.
The demand curve is a graphical representation of this relationship, with price on the y-axis and quantity on the x-axis.
An increase in demand shifts the demand curve rightward, while an increase in quantity demanded moves along the demand curve.

Market Demand

Market demand is the summation of all individual demands for a good or service.
The market demand curve is obtained by horizontally summing individual demand curves to find total quantity demanded at any given price.

Shifts in Demand Curve

The demand curve illustrates how price affects quantity demanded, holding all else constant.
Shifts in the demand curve occur due to changes in the number of buyers, income, prices of related goods, preferences, and expectations about the future.
A rightward shift indicates an increase in demand, while a leftward shift shows a decrease.

Changes in Income

Normal goods see increased demand as incomes rise, shifting the demand curve to the right.
Inferior goods experience a decrease in demand when income rises, shifting the curve leftward.

Substitute goods start to see an increase in demand when the price of one increases, as they can replace one another.
Complementary goods see decreased demand for one if the price of the other rises, since they are used together.

Changes in Tastes

A favorable shift in tastes towards a good increases its demand, resulting in a rightward shift of the demand curve.

Expectations About the Future

Anticipating higher future incomes or prices leads to an increase in current demand, shifting the curve rightward.

Supply

Quantity supplied is the amount sellers are willing to sell at a given price.
The Law of Supply states that higher prices typically lead to increased quantity supplied, while lower prices lead to decreased quantity supplied.
A supply schedule illustrates the relationship between price and quantity supplied.
The supply curve graphically represents this relationship, with price on the y-axis and quantity on the x-axis.

Market Supply vs. Individual Supply

Market supply is the aggregate supply from all sellers of a good or service.
The market supply curve is derived by horizontally summing individual supply curves to find total quantity supplied at various prices.

Shifts in the Supply Curve

Shifts in the supply curve occur due to changes in input prices, technology, the number of sellers, and future price expectations.
A rightward shift indicates an increase in supply, while a leftward shift denotes a decrease.
A reduction in input prices enhances profitability and boosts supply, resulting in a rightward shift.
Technological improvements also have a similar effect on the supply curve as they lower production costs.

Equilibrium

Equilibrium is established when the quantity supplied equals the quantity demanded at a specific price.

Markets Not in Equilibrium

A surplus occurs when the quantity supplied exceeds quantity demanded.
A shortage arises when quantity demanded surpasses quantity supplied.

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Description

This quiz explores the fundamental concepts of supply and demand within microeconomics. It covers the roles of buyers and sellers in determining market dynamics, as well as the characteristics of competitive markets. Perfect for understanding the basics of economic interactions.