Supply and Demand quiz review

3 important points (Demand)

a well defined system of property rights is needed for the market system to function. people respond well to incentives. People face constraints such as income and time

Law of Demand

A decrease in the price of the good causes an increase in the quantity demand and vice versa (not a change in demand but quantity demanded)

Demand curves (Law of Demand)

Curves slope downward and shows the relationship between the price and quantity demanded

Why does a demand curve slope downward? (1)

Diminishing Marginal Utility: The more of a good the consumer has, the less marginal utility of an additional unit (satisfaction) (1)

Why does a demand curve slope downward? (2)

Income effect: When the price of a good falls, consumers experience an increase in purchasing power (2)

Why does a demand curve slope downward? (3)

Substitution effect: when the price of a good increases, people will substitute (purchase) less expensive goods (3)

To find the market demand curve

1. Add the qualities together of all the individuals (quantity of the x-axis)

2. On the graph, keep the y-axis (price) the same

3. Draw the new demand curve which represents the market demand

Market demand

Adding together quantities that all consumers in the marketplace are willing to buy at each price

Reasons for changes in demand (1)

Change in income: If the good is a normal good and income increases, demand increases. If the good is inferior and income increases, demand decreases (1)

reasons for Change in demand (2)

Change in price of substitutes: If the price of the substitute good increases, demand for the good increases (coffee and tea) (2)

reasons for changes in demand (3)

Change of the price of complementary goods: If the price of the complement increases, demand for the good decreases (if price of jelly increases, demand for jelly decreases, and demand for peanut butter increases) (3)

reasons for changes in demand (4)

Change in the number of buyers: if the population increases, demand for the good increases (4)

reasons for changes in demand (5)

*Change in expectations: If people expect the price of the good to increase in the future, demand will increase (5)

reasons for the changes in demand (6)

Change in styles/tastes: They just feel like it I guess (6)

Price (demand)

doesn't affect demand

Law of supply

states that as price increases, the quantity supplied increases

Supply curves

slopes up to the right

Price (supply)

doesn't affect supply, only quantity supplied

Change in price (supply)

Causes supply movement up and down the supply curve (increase/decrease in quantity supply)

What causes supply to shift? (1)

Changes in the cost of production: if the cost of production increases, supply decreases. (If it gets more expensive to produce a good, firms supply less of the good) (1)

What causes supply to shift? (2)

Changes in technology: new technology that makes productivity increase causes supply to increase (If workers get more productive, then it becomes cheaper to produce the good) (2)

What causes supply to shift (3)

Changes in the number of seller: If there are more sellers in the market then there will be an increase in supply of the good. (As more firms entered the market for athletic footwear "sneakers", the total amount of athletic shoes increased in the market place) (3)

What causes supply to shift? (4)

Changes in expectations: if producers expect the price of the product to increase in the future, there will be a decrease in supply now. (if airlines expect the price of tickets to increase in 6 months, they will reduce the amount of flights offered now) (4)