Supply and Demand: Economics Quiz

• Economics studies how societies allocate limited resources to satisfy unlimited needs and desires.
• The word "economics" comes from the Greek "oikonomia," which means "household management."
• Economics studies how societies produce, distribute goods, and services.

Economic Systems

• Economic systems determine how resources are allocated.
• Market economies allocate resources through decentralized firm and household decisions in markets.
• Centrally planned economies involve government decisions on production, distribution, and prices.
• Mixed economies combine free markets with government intervention to correct failures and redistribute income.

Economic Models

• Economists act as scientists, explaining the economy through theories and models.
• Economists act as consultants, applying solutions to economic issues.
• Economics uses the scientific method by identifying patterns and behaviors through observation.
• Theories are developed via formulating hypotheses about economic interactions
• Empirical testing uses historical data and experiments to validate theories.
• Economic models simplify reality to predict economic outcomes.
• Economic models include variables - endogenous, exogenous, flow, stock, nominal and real

Endogenous & Exogenous Variables

• Endogenous variables are determined within the model such as consumer spending.
• Exogenous variables are determined outside the model, like population growth.
• Flow variables are measured over time such as income.
• Stock variables are measured at a specific moment such as wealth.
• Nominal variables are expressed in current prices such as nominal GDP.
• Real variables are adjusted for inflation such as real GDP.
• Economic models should be manageable, understandable, realistic, and testable.
• Positive analysis describes economic consequences without judgment, based on assumptions.
• Normative analysis evaluates policies based on societal goals.

Circular-Flow Model

• Movement of resources and money in an economy involve:
• Households supply labor and consume goods.
• Firms produce goods and services, paying wages.
• Government taxes and redistributes income.
• Financial markets facilitate saving and investment.
• The foreign sector represents international trade and capital flows.
• Main flows: factor services, wages, rents, interest, profits, and personal consumption.

Microeconomics vs. Macroeconomics

• Microeconomics focuses on individual decisions, market structures, and price formation.
• Macroeconomics examines aggregate indicators like GDP and unemployment.
• Microeconomics studies agents, while macroeconomics analyses overall performance and policy.

Fundamental Economic Questions

• Goods and services are produced based on available resources and consumer demand.
• Market economies are determined by supply and demand, while planned economies are decided by the government.
• Goods are produced using factors like labor, capital, and natural resources, this depends on economic structure.
• Distribution is based on power in a market economy and societal needs in a planned economy.
• Firms and households make decisions via decentralized interactions.

Market Forces of Supply and Demand

• Markets involve buyers and sellers exchanging goods and services.
• Supply and demand determine price and quantity in a competitive market.
• Market analysis reveals how forces allocate scarce resources efficiently.
• Market types include: perfectly competitive, monopoly, oligopoly, and monopolistic.

Perfectly Competitive Market

• Many buyers and sellers with homogenous goods and perfect info means no single entity influences price.
• A monopoly one seller dominates.
• An oligopoly is where a few large firms control the market.
• Monopolistic competition: where many sellers offer differentiated products.
• Demand is determined by willingness & ability to purchase goods at various prices.
• Law of Demand says as price rises, quantity reduces (ceteris paribus), so price determines quantity demanded.

Shifts in the Demand Curve

• Shift in variable means only that variable is focussed on
• If factors change then the demand curve will shift
• Greater price means reduced quantity demanded.
• Normal goods: demand increases with income, Inferior goods mean demand falls with income. Demand means [\→\ ]; [ ← ] demand decreases.

Prices of Related Goods

• Substitutes: Price increase in one, means demand falls for the other
• Complements: Price increase in one, means demand increase in the other.
• Favorable changes means demand increases.
• Future price decrease expectations → Current demand decrease because expectations exist about future income, future prices or economy
• More buyers → Higher demand ( [→ ]).

Market Demand Curve

• Total quantity demanded is the sum of two individual demand curves

Market Supply

• Supply depends on willingness and ability of producers to sell at different prices.
• Price is the only determinant of the quantity supplied.
• As price increases, quantity supplied increases due to the Law of Supply.
• Shift in curve requires factoring variables
• Greater price equates to more quantity supplied.
• Lower production costs due to lower input prices creates more supply
• Advancements in tech improves supply via improved costs and innovation.
• Expectation of future price rise → Reduced current supply.
• More sellers → Increased supply.
• Total demand in a curve is the total of all supply curves

Market Equilibrium

• Equal supply & demand enables you to determine market-clearing price.
• Equilibrium Price is where supply meets demand.
• equilibrium quantity is the one exchanged at equilibrium price.
• Surplus occurs when supply exceeds demand and puts downward pressure on prices.
• Shortage occurs when demand exceeds supply, leading to upward pressure on prices.
• Comparative Statics analyses how equilibrium changes when supply or demand shifts.

Elasticity Concept

• Elasticity measures how quantity demanded or supplied responds to price changes.

• PED - Price Elasticity of Demand measures responsiveness of quantity demanded to price changes.

  • Elastic demand (PED > 1): Consumers react significantly to price changes.
  • Inelastic demand (PED < 1): Consumers react minimally.
  • Unit elastic demand (PED = 1): Proportional change in demand to price.
  • Perfectly inelastic demand (PED = 0): One extreme case.
  • Perfectly elastic demand (PED = 0): The other extreme case.

• Price elasticity of demand depends on available substitutes, necessity, and time horizon.

• Total revenue is the amount paid by buyers and received by sellers of the good [Revenue = P x Q]

  • Elastic demand (PED > 1): % change Q > % change P.
  • Inelastic demand (PED < 1): % change Q < % change P.

• Income measures of much quantity demanded responds to change in customers income using the following formula: E=Percentage change in quantity demanded / Percentage change in income.

• Cross-pricing measures quantity demanded of one products with the pricing of another. Formula: Ecp =Percentage change in quantity demanded of good 1 / Percentage change in the price of good 2 - the result is positive or negative, depending on whether the two goods are complements or substitutes.

• PES - Price Elasticity of measures responsiveness of quantity supplied to price changes - which depends on the flexibility of sellers to change the amount of the good they produce when price changes:

  • Inelastic (PES < 1): The prices rise, and the quantities rise less.
  • Unit elastic (PES = 1): The prices and the quantities rise in equilibrium.
  • Elastic (PES > 1): The prices rise, and the quantities rise more.
  • Perfectly inelastic (PES = 0): One extreme case
  • Perfectly elastic (PES = 0): The other extreme case

Consumer and Porudcer Surplus

• CS - Consumer Surplus is the buyer's willingness to pay for a good
• PS - Porudcer Surplus measures the value of everything a seller must give up to produce a good.
• TS - Total Surplus is the measurement of overall economic welfare with the following formula: Value to buyers - Cost to sellers

Impact of Taxes

• Tax revenue uses following formula [T x Q] Q is quantity sold, and T is the size of the tax. Although all if formed by the price buyers pay less the price sellers receive
• Tax is a deadweight loss, where the full in surplus results from a market distortion. The dimension of the tax depends on how the quantity demanded or supplied respond to changes, and price elasticities of supply and demand. Greater demand or supply elasticities derivatives depend on:
  • Larger decline in equilibrium quantity
  • Greater the deadweight loss of a tax
  • Lower the tax burden for those agents Tax Incidence means the determination of how tax burdens are shared between buyers and sellers. Effect on Market: Taxes increase prices for consumers and reduce sellers received prices, leading to lower equilibrium quantities. Deadweight Loss: The efficiency loss caused by reduced trade because of taxation.