Economics Review – Supply, Demand, Equilibrium

A set of Q&A flashcards covering key concepts of supply, demand, and market equilibrium from the lecture notes.

What is market supply?

the total quantity of a specific good/service that ALL producers in a market are willing and able to offer for sale

What is the relationship between price and quantity supplied?

Direct relationship: as price goes up, quantity supplied goes up (price is an independent variable for suppliers).

What causes a supply curve to shift (not just move along)?

Non-price determinants such as input/resource prices, number of sellers, technology, taxes/subsidies, and weather.

What happens to supply when input costs decrease?

Supply shifts right (increases).

What is market equilibrium?

The point where quantity supplied equals quantity demanded; the market-clearing price where the market clears.

What indicates a surplus in the market?

Price is above equilibrium, creating excess supply.

What indicates a shortage in the market?

Price is below equilibrium, creating excess demand.

If supply increases, what happens to price and quantity?

Price falls and quantity rises.

If demand decreases, what happens to price and quantity?

Both price and quantity fall.

If both supply and demand fall, what happens to quantity?

Quantity always falls; the price effect is indeterminate without information on magnitudes.

What does a rightward shift of the supply curve represent?

An increase in supply (supply increases; curve shifts right).

List the determinants of supply.

Decrease in resource prices; increase in number of sellers; technological improvements; reduction in taxes or increase in subsidies; favorable weather.

What is the market clearing price?

The equilibrium price at which quantity supplied equals quantity demanded.

In the gasoline example, what happens at the equilibrium price of $1.40?

Quantity demanded equals quantity supplied (600 million gallons).

What happens when price is above equilibrium in general (surplus) and below equilibrium (shortage)?

Above equilibrium => surplus (excess supply); producers lower price. Below equilibrium => shortage (excess demand); buyers bid up price.

What is the effect on equilibrium when there is an increase in supply and demand remains unchanged?

Equilibrium price falls; equilibrium quantity rises.

What is the effect on equilibrium when there is a decrease in supply and demand remains unchanged?

Equilibrium price rises; equilibrium quantity falls.

What happens when both supply and demand increase at the same time?

Equilibrium quantity rises; the price effect is indeterminate without knowing which shift is bigger.

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

Movement along a curve is caused by price changes; shifts are caused by non-price factors.

What did Adam Smith argue about government intervention in markets?

He argued against government intervention, believing markets self-regulate.

What should homework/tests focus on according to the notes?

Interpreting scenarios by identifying which curves shift and predicting resulting price/quantity changes; graphing helps.