demand&supply quiz

8/7/2019 demand&supply quiz

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Market Supply andDemand

Key Concepts Summary

Practice Quiz



What is the

Law of Demand?The principle that there is an

inverse relationship betweenthe price of a good and thequantity buyers are willing to

purchase in a defined time period, ceteris paribus



What does ³ceterisparibus´ mean?

All else remains the same



What is a demandcurve?

Depicts the relationship between price andquantity demanded



Rs20

Rs15

Rs10

Rs5

4 8 12 16

AB

C

D

Individual¶s Demand Curve for Compact Discs

Demand Curve

P

Q

7

A Rs 20 4

B Rs 15 6

C Rs 10 10

D Rs 5 16

Point Price Quantity demandedper compact disk (per year)

Individuals Buyer¶s Demand Schedule for Compact Discs



Why do demand curves

have a negative slope?

At a higher price consumerswill buy fewer units, and at alower price they will buymore units



What is ademand schedule?

Shows the specific quantity of a good or service that peopleare willing and able to buy atdifferent prices



What is market demand?

The summation of theindividual demand schedules



IMPORTANT

KNOW THE DIFFERE NCE

BETWEE N A CHANGE I N THEQUANTITY DEMANDED AND A

CHANGE I N DEMAND



When price changes -

what happens?

The curve does not shift -there is a change in the

quantity demanded



Decrease in

Price

Increase inQuantity

Demanded



Rs20

Rs15

Rs10

Rs5

1 2 3 4

P

Q5 6 7 8 9

Rahul¶s Demand Curve

D1



Rs20

Rs15

Rs10

Rs5

1 2 3 4

P

Q5 6 7 8 9

Mohan¶s Demand Curve

D2



Rs20

Rs15

Rs10

Rs5

3 4 5 6

P

Q

7 8 9 1011

Market Demand Curve

D3

12



12

R s20

R s15

R s10

R s5

1 2 3 4 Q5 6 7 8 9

R a l¶s De a C rve

D1

13

R s20

R s15

R s10

R s5

1 2 3 4 Q5 6 7 8 9

M a ¶s De a C rve

D2

14

R s20

R s15

R s10

R s5

3 4 5 6

Q

7 8 9 1011

Mar e De a C rve

D3

12



Rs25 1 + 0 = 1

Rs20 2 1 3Rs15 3 3 6

Rs10 4 5 9

Rs5 5 7 12

Price Fred Mary Total Demanded

Market Demand Schedule for Compact Discs



Rs20

Rs15

Rs10

Rs5

10 20 30 40

A

B

A change in price causes achange in the quantity demanded

D

P

Q

50



When somet

hing c

hangesother than price, what

happens?

The whole curveshifts,there is a change

in demand



Rs20

Rs15

Rs10

Rs5

10 20 30 40

D1

D

2

P

50

A

When the ceteris paribus assumptionis relaxed, the whole curve can shift

Q

B



Change in

nonpricedeterminant

Increase

in demand



What can cause a shift in ademand curve?

Tastes and preferences Number of buyers in the market

Income

Ex pectations of consumers

Prices of related goods



Priceincreases

Upwardmovementalong the

demand curve

Decrease inquantitydemanded



Pricedecreases

Downwardmovementalong the

demand curve

Increase inquantitydemanded



Nonpricedeterminant

Leftward or rightward shift in

the demand curve

Decrease or increase indemand



What is a normalgood?

Any good for which there is a directrelationship between

changes in income andits demand curve



What is aninferior good?

Any good for which there is an inverserelationship betweenchanges in income andits demand curve



What aresubstitute goods?

Goods that compete with one another for consumer purchases



What happens when the price increases for a good

that has a substitute?

The demand curve for the

substitute good increases



What happens when the price decreases for a good

that has a substitute?

The demand curve for the

substitute good decreases



What does a direct

relationship between price and quantitymean?

The two move in the samedirection



What are complementarygoods?

Goods that are jointlyconsumed with another good



What happens when the

price increases for a goodthat has a complement?

The demand curve for thecomplements good

decreases



What happens when the

price decreases for a goodthat has a complement?

The demand curve for thecomplements good

increases



What does an inverserelationship between price& quantity mean?

It means that the twomove in opposite

directions



What is the

law of supply?The principle that there is a

direct relationship betweenthe price of a good and thequantity sellers are willing

to offer for sale in a definedtime period, ceteris paribus



Why do supply curveshave a positive slope?

Only at a higher price will it be profitable for sellers to incur the higher opportunity cost

associated with supplying alarger quantity



Rs20

Rs15

Rs10

Rs5

10 20 30 40

A

BC

Supply CurveA company¶sSupply Curve for

Compact Discs

P

Q



A Rs20 40

B 10 30

C 6 20

Point Price Quantity

An Individual Seller¶s Supply for Compact Discs



What is a market?Any arrangement in which

buyers and sellers interactto determine the price andquantity of goods and

services exchanged



What is market supply?

The horizontal summation of allthe quantities supplied atvarious prices that might

prevail in the market



Rs25

Rs20

Rs15

Rs10

40

P

Q45 55

Market Supply Curve

60

S total



Rs 25

Rs20

Rs15

Rs10

10

P

Q15 20

Super Sound Supply Curve

S1

25



Rs25

Rs20

Rs15

Rs10

20

P

Q25 30

High Vibes Supply Curve

S2

35



Rs25 25 + 35 = 60

Rs20 20 30 50

Rs15 15 25 40

Rs10 10 20 30

Rs5 5 15 20

Price Super Sound High Vibes Total

Market Supply Schedule for Compact Discs



IMPORTANT

KNOW THE DIFFERE NCE

BETWEE N A CHANGE I NTHE QUANTITY SUPPLIED

AND A CHANGE I NSUPPLY



W

hen price changes,what happens?

The curve does not shift -there is a change in thequantity supplied



Rs20

Rs15

Rs10

Rs5

10 20 30 40

A

BC

Supply CurveA change in pricecauses a change

in the quantitysupplied

P

Q



Increase in

Price

Increase inQuantity

Supplied



W

hen something changesother than price, whathappens?

The whole curve shifts - thereis a change in supply



Rs20

Rs15

Rs10

Rs5

10 20 30 40

S1 S2

When the ceteris paribusassumption is relaxed, the

whole curve can shiftP

Q



Change in

nonpricedeterminant

Increase

in supply



What can cause a shift in a

supply curve?1. Number of sellers in the market2. Technology3. R esource prices4. Taxes and subsidies

5. Ex pectations of producers6. Prices of other goods the firmcould produce



Rs1200

Rs900

Rs600

Rs300

1,000 2,000 3,000 4,000

D

S

The Supply & Demandfor Tennis ShoesP

Q

Surplus

Shortage



What is an equilibrium?A market condition that occurs

at any price for which thequantity demanded and the

quantity supplied are equal



What is the pricesystem?

A mechanism that uses the

forces of supply anddemand to create an

equilibrium through risingand falling prices



Suppose that the Intel microprocessor chips

(Pentium, etc.) increases in price by about

10%. What will happen to Microsoftsoftware?

If the price of one product rises and the

quantity demanded of another product falls,then we say the products are complements.

Cross Price Elasticity



Suppose that Coca-Cola raises its price by

10%.

What happens to sales of Pepsi? If the price of one product rises and the

quantity demanded of another product rises,

we say the products are substitutes.

Cross Price Elasticity



Utility Max: Marginal

Suppose you could measure happinessfrom consumption of apples, then,

suppose that the following situation

exists:

Unit 1 = 8 units of happiness

Unit 2 = 6 units of happiness Unit 3 = 4 units of happiness

Unit 4 = 2 units of happiness




The total amount of happiness depends onhow much of the good we have.

Units Total HappinessUnit 1 6 units of happiness

Unit 2 14

Unit 3 18

Unit 4 20




The total amount of happiness depends on howmuch of the good we have.

Units Total Happiness Marginal

Unit 1 6 6

Unit 2 14 8

Unit 3 18 4

Unit 4 20 2

10MU



10

8

6

42

20

15

10

5

Total utility

MU

Quantity of Good orActivity1 2 3 4 5 6

The first Unit

gives us 6 unitsof happiness

MU



10

8

6

4

2

20

15

10

5

Total utility

MU


The second unit

gives us 8 units

of happiness

The first two units

then are providing a

total of 14 units of

happiness

MU



10

8

64

2

15

10

5

Total

utility

MU


Even though MU

is falling, totalutility continues to

rise until .....

10MU



10

8

6

4

2

15

10

5

MU reaches zero.

Zero MU means MAX Total Utility.Any

more consumption

andMU is negative sototal utility declines

Total

utility

MU




K ey Concepts

What is the law of demand?

What is a demand curve?

Why do demand curves have a negative slope?

When price changes, what happens?

When something changes other than price, what

happens?

What can cause a shift in a demand curve?



K ey Concepts



K ey Concepts cont.

What is the law of supply?

Why do supply curves have a positive slope?

When price changes, what happens?

When something changes other than price, whathappens?

What can cause a shift in a supply curve?

What is a market?

What is an equilibrium?



68

Summary



69

The law of demand states there isan inverse relationship betweenthe price and the quantity

demanded, ceteris paribus. Amarket demand curve is thehorizontal summation of individual

demand curves.

I di id l¶ D d C f C t Di



Rs20

Rs15

Rs10

Rs5

4 8 12 16

AB

C

D

Individual¶s Demand Curve for Compact Discs

Demand Curve

P

Q

7

A s 20 4

s 15 6

s 10 10

s 5 16

oi t rice Q a tity e a eer co act is ( er year)

I ivi als yer¶s e a c e le for o act iscs



71

A change in quantity demanded is a

movement along a stationarydemand curve caused by a changein price. When any of the nonpricedeterminants of demand changes,the demand curve responds byshifting. An increase in demand (rightward shift) or a decrease in

demand (leftward shift) is causedby a change in one of the nonpricedeterminants.

Wh th t i ib ti



Rs20

Rs15

Rs10

Rs5

10 20 30 40

D1

D2

P

50

A

When the ceteris paribus assumptionis relaxed, the whole curve can shift

Q

B



73

Nonprice determinants of demand:

a. the number of buyers,

b. tastes and preferences.

c. income (normal and inferior).d. expectations of future p;rice andincome changes, and

e. prices of related goods(substitutes and complements)



74

The law of supply states there is adirest relationship between theprice and the quantity supplied,ceteris paribus. The market supplycurve is the horizontal summationof individual supply curves.



75

A change in quantity supplied is amovement along a stationarysupply curve caused by a change inprice. When any of the nonpricedeterminants of supply changes,

the supply curve responds byshifting. An increase in supply (rightward shift) or a decrease insupply (leftward shift) is caused bya change in one of the nonpricedeterminants.

A company¶s



Rs20

Rs15

Rs10

Rs5

10 20 30 40

A

BC

Supply CurveA company¶sSupply Curve for

Compact Discs

P

Q

Wh th t iP



Rs20

Rs15

Rs10

Rs5

10 20 30 40

S1 S2

When the ceterisparibus assumption

is relaxed, the wholecurve can shift

P

Q



78

Nonprice determinants of supply:

a. the number of sellers.

b. technology

c. resource prices.d. taxes and subsidies.

e. expectations of future price

changes,f. prices of other goods.



79

A surplus or shortage exists at any

price where the quantitydemanded and the quantitysupplied are not equal. When theprice of a good is greater than theequilibrium price, there is anexcess quantity supplied called asurplus. When the price is less

than the equilibrium price, there isan excess quantity demandedcalled a shortage.



80

Equilibrium is the unique price andquantity established at theintersection of the supply and the

demand curves. Only atequilibrium does quantitydemanded equal quantitysupplied.

The Supply & DemandP



Rs120

Rs90

Rs60

Rs30

1,000 2,000 3,000 4,000

D

S

The Supply & Demandfor Tennis ShoesP

Q

Surplus

Shortage



82

The price system is the supply anddemand mechanism thatestablishes equilibrium through the

ability of prices to rise or fall.



Quiz that all of you

love



1. If the demand curve for good X is downward-sloping, this means that an increase in the

price will result in

a. an increase in the demand for good X.b. a decrease in the demand for good X.

c. no change in the quantity demanded forgood X.

d. a larger quantity demanded for good X.e. a smaller quantity demanded for good X.



Answer 1

E. When price changes thereis a opposite change in the

quantity demanded asmeasured on the horizontalaxis.



2. The law of demand states that the quantitydemanded of a good changes, other things

being equal, when

a. the price of the good changes.

b. consumer income changes.

c. the prices of other goods change.

d. a change occurs in the quantities of othergoods purchased.



Answer 2

A. A ³change in demand´means that the whole curveshifts, but a ³change in thequantity demanded´ meansthat there is movementalong a stationary curve.

3 Whi h f th f ll i i th lt f



3. Which of the following is the result of adecrease in the price of tea, other thingsbeing equal?

a. A leftward shift in the demand curvefor tea.

b. A downward movement along thedemand curve for tea.

c. A rightward shift in the demand curvefor tea.

d. An upward movement along thedemand curve for tea.



Answer 3

B. Because demand curveshave a negative slope, asthe price declines, thequantity demanded willincrease.

4 Which of the following will cause a



4. Which of the following will cause amovement along the demand curve for X?

a.A change in the price of a closesubstitute.

b.A change in the price of good X.

c.A change in consumer tastes andpreferences for good X.

d.A change in consumer income.



Answer 4

B. Movement along a given

demand curve always occurs whenthe price changes, if anything

other than price changes, then the

whole curve will shift.

5.Assuming that beef and chicken are



substitutes, a decrease in the price of chicken will cause the demand curve for

beef toa. shift to the left as consumers switch

from chicken to beef.

b. shift to the right as consumers switch

from chicken to beef.c. remain unchanged, since beef and

chicken are sold in separate markets.

d. none of the above.



Answer 5

A. With a decrease in the

price of chicken people will

want to buy more chicken;

because beef and chicken

are substitutes, they will

buy less beef.

6.Assuming that coffee and tea are substitutes, a



decrease in the price of coffee, other thingsbeing equal, results in a (an)

a. downward movement along the demandcurve for tea.

b. leftward shift in the demand curve for tea.

c. upward movement along the demand curvefor tea.

d. rightward shift in the demand curve for tea.



Answer 6

B. With a decrease in theprice of coffee people willwant to buy more coffee;because coffee and tea aresubstitutes, they will buyless at possible prices fortea.

7.Assuming steak and potatoes are



g pcomplements, a decrease in the price of steak will

a. decrease the demand for steak.

b. increase the demand for steak.

c. increase the demand for potatoes.d. decrease the demand for potatoes.



Answer 7

C. With a decrease in theprice of steak people willwant to buy more steak;because steak and potatoesare complements, they willbuy more potatoes as well.

8.Assuming that steak is a normal good, a



g g ,decrease in consumer income, other thingsbeing equal, will

a. cause a downward movement along thedemand curve for steak.

b. shift the demand curve for steak to theleft.

c. cause an upward movement along thedemand curve for steak.

d. shift the demand curve for steak to theright.



Answer 8

B. Normal goods are goodsthat people will buy moreof as their incomes increaseand less of as their incomedecreases.

9.An increase in consumer income, other



9.An increase in consumer income, otherthings being equal, will

a. shift the supply curve for a normal goodto the right.

b. cause an upward movement along the

demand curve for an inferior good.c. shift the demand curve for an inferior

good to the left.

d. cause a downward movement along the

supply curve for a normal good.



Answer 9

C. Inferior goods are goodsthat people will buy less of at possible prices as theirincome increases.

10. Yesterday, sellerA supplied 400 units of a



y ppgood X at R s10 per unit. Today, sellerA supplies the same quantity of units at R s5 per

unit. Based on this evidence, sellerA hasexperienced a (an)

a. decrease in supply.

b. increase in supply.

c. increase in the quantity supplied.

d. decrease in the quantity supplied.

e. increase in demand.



Answer 10

B. A shift to the right of asupply curve along astationary demand curvewill result in a lower priceas illustrated on the nextpage.

When the ceteris paribusassumption is relaxed theP



Rs20

Rs15

Rs10

Rs5

10 20 30 40

S1 S2

assumption is relaxed, thewhole curve can shiftP

Q

11.An improvement technology causes a (an)



a. leftward shift of the supply curve.

b. upward movement along the supply curve.c. firm to supply a larger quantity at anygiven price.

d. downward movement along the supply

curve.



Answer 11

C. When price changes, the supply curveitself does not change, but when other

things change, the whole curve will shift.A change in technology is an example of what can cause the supply curve to shift.

12. Suppose auto workers receive a substantiali Oth thi b i l th



wage increase. Other things being equal, theprice of autos will rise because of a (an)

a. increase in the demand for autos.b. rightward shift of the supply curve for

autos.

c. leftward shift of the supply curve for autos.

d. reduction in the demand for autos.



Answer 12

C. A change in costs for a business is afactor that will shift the supply curve. If costs go up, as in the case of having to

pay higher wages, the supplier has less of an ability to supply cars.

13.Assuming that soybeans and tobacco can bothbe grown on the same land, an increase in the



be grown on the same land, an increase in theprice of tobacco, other things being equal, causesa (an)

a. upward movement along the supply curve forsoybeans.

b. downward movement along the supply curve

for soybeans.c. rightward shift in the supply for soybeans.

d. leftward shift in the supply for soybeans.



Answer 13

D. With an increase in the price of tobaccofarmers will want to grow more tobaccoto take advantage of the higher price.

Farmers will therefore plant soybeans onland they used to use for tobacco.

14 If Q quantity demanded and Q



14. If Qd = quantity demanded and Qs =quantity supplied at a given price, a

shortage in the market results whena. Qd is greater than Qs.

b. Qs equals Qd.

c. Qs is less than or equal to Qd.d. Qs is greater than or equal to Qd.



Answer 14

A. When there are more units of somethingbeing demanded than being supplied, ashortage will result.

15.Assume that the equilibrium price for a goodis R s10. If the market price is R s5, a



p ,

a. shortage will cause the price to remain atR

s5.b. surplus will cause the price to remain at R s5.

c. shortage will cause the price to rise towardR s10.

d. surplus will cause the price to rise towardR s10.



Answer 15

C. When the price of a good is below themarket price, there are less units beingsupplied than being demanded. The

result is a shortage and consumers willbid the price up toward the equilibriumprice.

Supply & Demand ExhibitP



100 200 300 400D

S

Supply & Demand ExhibitP

Q

Rs2.00

Rs1.50

Rs1.00

Rs.50

16 In the market shown in the previous graph



16. In the market shown in the previous graph,the equilibrium price and quantity of good X

are

a. R s0.50, 200.

b. R s1.50, 300

c. R s2.00, 100

d. R s1.00, 200

Previous graph



Answer 16

D. The equilibrium price and equilibriumquantity are at the point where thequantity demanded equals the quantity

supplied. This is the price toward whichthe economy tends.

17 I th i h t i f R 2 00



17. In the previous graph, at a price of R s2.00,the market for good X will experience a

a. shortage of 150 units.

b. surplus of 100 units.

c. shortage of 100 units.

d. surplus of 200 units.

Previous graph



Answer 17

D. At a price of R s2.00 the quantitydemanded is 100 and the quantitysupplied is 300; 300 units minus 100

equals 200 units.

18. In the previous graph, if the price of goodX f R 1 00 t R 2 00 th



X moves from R s1.00 to R s2.00, the newmarket condition will put

a. upward pressure on price.

b. no pressure on price to change.

c. downward pressure on price.

d. upward pressure on price.

Previous graph



Answer 18

C. Anytime the price is above theequilibrium price a surplus will result.Suppliers will therefore lower price to get

rid of the surplus.



E ND

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demand&supply quiz