Economics Test Study Guide: Supply and Demand

Flashcards generated from the Economics Test Study Guide covering supply, demand, determinants, equilibrium, shortages, surpluses, and practice scenarios.

What is supply?

Supply is the different quantities of a good or service that sellers are willing and able to produce and sell at different prices during a given period.

What does the Law of Supply state?

The Law of Supply states that price and quantity supplied have a DIRECT (positive) relationship, assuming other factors stay the same (price increases $\rightarrow$ quantity supplied increases; price decreases $\rightarrow$ quantity supplied decreases).

Why do higher prices lead to an increased quantity supplied?

Higher prices can make production more profitable, giving firms an incentive to produce and sell more.

On a supply graph, what do the vertical and horizontal axes represent?

The vertical axis ($Y$) represents Price ($P$) and the horizontal axis ($X$) represents Quantity ($Q$).

How is a supply curve ($S$) generally sloped on a graph?

A supply curve generally slopes upward from left to right.

What effect does a change in a good's own price have on its supply curve?

A change in the good's own price causes movement along the existing supply curve, not a shift.

What are the 5 determinants (shifters) of supply?

1. Input prices / availability of resources, 2. Number of sellers, 3. Technology, 4. Government action: taxes and subsidies, 5. Expectations of the future.

How do input prices and resource availability affect the supply curve?

Cheaper or more available inputs increase supply (shifts right), while more expensive or less available inputs decrease supply (shifts left).

How does the number of sellers in a market impact supply?

More sellers entering the market increases supply (shifts right), while sellers leaving the market decreases supply (shifts left).

How does technology influence supply?

Improved technology or more efficient production increases supply (shifts right), whereas production problems or less effective technology decrease supply (shifts left).

How do taxes and subsidies affect supply?

A business tax raises production costs, causing supply to decrease (shifts left). A subsidy lowers production costs or encourages production, causing supply to increase (shifts right).

How do future price expectations affect current supply?

If sellers expect a higher price in the future, current supply can decrease (shifts left) as goods are held back. If sellers expect a lower future price, current supply can increase (shifts right).

What is the memory cue for supply curve shifts?

Supply right = more; supply left = less.

What is the difference between movement along a supply curve and a shift of a supply curve?

Movement along supply is caused by a change in the product's own price and changes quantity supplied. A shift of supply is caused by a non-price determinant and moves the entire curve right or left.

What is demand?

Demand is the different quantities of a good or service consumers are willing and able to buy at different prices.

What does the Law of Demand state?

The Law of Demand states that price and quantity demanded have an INVERSE (negative) relationship, assuming other factors stay the same (price increases $\rightarrow$ quantity demanded decreases; price decreases $\rightarrow$ quantity demanded increases).

How is a demand curve generally sloped?

A demand curve generally slopes downward from left to right.

What is market equilibrium?

Equilibrium is where the supply and demand curves intersect, meaning quantity supplied ($Q_s$) equals quantity demanded ($Q_d$). There is no shortage or surplus.

If supply increases (shifts right) while demand stays the same, what happens to equilibrium price and equilibrium quantity?

Equilibrium price falls and equilibrium quantity rises.

If supply decreases (shifts left) while demand stays the same, what happens to equilibrium price and equilibrium quantity?

Equilibrium price rises and equilibrium quantity falls.

If demand increases (shifts right) while supply stays the same, what happens to equilibrium price and equilibrium quantity?

Equilibrium price rises and equilibrium quantity rises.

If demand decreases (shifts left) while supply stays the same, what happens to equilibrium price and equilibrium quantity?

Equilibrium price falls and equilibrium quantity falls.

What is a shortage, and how does price react?

A shortage occurs when quantity demanded is greater than quantity supplied ($Q_d > Q_s$). It commonly occurs below equilibrium price, and price tends to rise.

What is a surplus, and how does price react?

A surplus occurs when quantity supplied is greater than quantity demanded ($Q_s > Q_d$). It commonly occurs above equilibrium price, and price tends to fall.

The cost of flour falls. What happens to cookie supply?

Supply increases; the curve shifts right.

Sellers expect a higher price next month and store the product now. What happens to current supply?

Current supply decreases; it may shift left.