Economics Quiz 2 (Supply and Demand)

How do you derive a market demand curve?

horizontally sum the individual demand curves. At each price, we’re summing the quantity demanded over consumers 

Derive the linear equation

Demand

the relationship between the quantity of a good consumers are willing and able to purchase and factors that affect this quantity

What is the function of quantity demanded at the market level?

Q_d= f (price, income, preferences, prices of related goods, expectations about the future, number of buyers)

How can demand be expressed as a function?

Q_D= f (price, preferences, prices of related goods, expectations about future, income)

Perfectly Competitive Market

Bunch of sellers, bunch of buyers. Good that is produced and traded is identical. There’s a common trading price

What are important factors of a perfectly competitive market?

• good is identical and similarly priced

• There’s perfect information: what you know about the market is the same as what someone else knows about the market

• No transactions cost. Prices are identical all the time. It’s relatively costless for consumers to shift purchases  

What is generally the primary determinant of demand (DOD)?

Price

What is the fundamental law of demand (LOD)?

if price falls (or rises), the quantity demanded will rise (or fall) if all other factors remain constant

How do you figure out the fundamental law of demand?

isolate the relation between QD and P (price)

What is the graphical depiction of the law of demand?

an inverse demand curve

How are demand curves graphed?

the independent variable (P) is on the y-axis and the dependent variable (Dij) on the x-axis 

What is Dij on a demand curve?

consumer i’s demand curve for good j

Why might different consumer’s demand for the same good differ?

due to preferences and income

What can be determined from a consumer’s demand curve?

• There is a choke price 

• The quantity demanded is finite even if the price is 0 

• The demand curve need not be linear. The individual may not respond to price changes at a constant rate 

How can you find a consumer’s total expenditures?

p x Q (price times quantity), the area of a rectangle

What is the choke price?

the price above which the consumer is not willing to purchase any units (a₀=0)

What are two ways to interpret a consumer’s demand curve?

• it identifies the maximum QD at a given price (pick price, observe Qs)

• it identifies the consumer’s WTP for each additional unit.

What is the marginal maximum willingness to pay?

Consumer has maximum they’ll pay for the first unit, and for the second. changes based on quantity

How do you figure out a marginal maximum willingness to pay curve?

You pick the Qs, and observe WTPs

Supply

refers to the relationship between the quantity of a good a firm would be willing and able to produce and factors that affect this quantity

What is the function of supply, on the individual producer/firm level?

Q_s = f (price, input prices, level of technology/efficiency in the production process, taxes/subsidies, expectations)

What would likely happen if production cost increased or decreased?

production would likely decrease, or increase

When is production process A more efficient than B?

if a given amount of input results in more output

if less input produces more output

Why are taxes and subsidies factors in the quantity supplied?

Taxes/tariffs increase production costs, so may reduce production

Subsidies increases production. 

Subsidies

when the government gives money to incentivize production

Law of Supply

as price rises (falls), all other factors held constant, the quantity supplied can be expected to increase (decrease)

What are the two interpretations of a supply curve?

Shows at given quantity, minimum willing to accept

Shows at a given price, maximum quantity supplied

What is the shape of a supply curve?

a positive increasing (exponential-like) function

What does the label Sij mean on a supply curve?

seller i’s supply curve for good j

What is the y-intercept on a supply curve?

reservation price

Reservation Price

the price at or below which the seller would be willing to sell no units/not do the service

What are the main factors that affect reservation price?

May be affected by input prices/costs or level of efficiency/technology (or other outside circumstances)

The seller has a ____________ _______________ ___ __________

minimum willingness to accept

The firm need not respond to price changes at a _________ ________

constant rate

Why might one firm be more responsive to price changes than others?

different technologies

What happens to supply when factors other than price change?

• The quantities at each price will change 

• Seller willingness to accept for each incremental unit will change

What happens to the supply curve if the price of one or more inputs rises?

the price of production increases (the supply curve shifts left, so decreases)

So, the quantity supplied will decrease for the same price 

Or, the price of the good will increase for the same quantity 

What happens to the supply curve if taxes are imposed/go up?

it increases the cost of doing business. So, at a given price, less output. If at a given output, the price increases. Will also decrease supply (left)

What happens to the supply curve if level of technology decreases?

the level of technology decreases, because production will be less efficient. So, production costs will be higher.

So, at a given price, quantity will decrease

At a given quantity, the price will increase

How do you use subscripts/superscripts on supply/demand curves?

Subscripts (0) connect to the (initial) quantity, superscripts (0) connect to the (initial) price

How do you derive market supply?

we simply horizontally sum the individual supply curves over sellers

What is the function of supply at the market level?

Qs = f (price, input prices, level of technology/efficiency in the production process, taxes/subsidies, expectations, number of sellers)

What do “high” prices result in?

surplus units (sellers). Competition amongst different sellers puts downward pressure on price until the market “clears”

Market Equilibrium

when the “market clears”, or when the surplus is gone; when quantity supplied equals quantity demanded.

What do “low” prices result in?

shortages, competition amongst buyers puts upward pressure on price until the market clears and equilibrium is established

On a market demand curve, why do you put the highest choke price as the market choke price?

because above that price, absolutely no one is willing to buy any units. As you go down from that highest choke price, you get more and more people willing to pay within the market