Download Economics Quiz #3 Notes Supply and Demand Spring 2015

Quiz #3 Notes
Supply and Demand
•Voluntary
•Utility
•Law
exchange – buyers and sellers trade freely
– Ability to satisfy consumers wants. Fancy word for satisfaction.
of diminishing utility – additional satisfaction decreases from buying one more
unit.
•Real
income effect – If Price increases or decreases and income stays the same, the
quantity purchased will decrease or increase.
•Substitution
effect – If two items take care of same need and the price increases of one
of them, people will buy the other. Example: Butter vs. Margarine
•Elasticity
– Measures how quantity demanded or quantity supplied changes according
to price and other economic condition.
•Price
elasticity of demand – The change in demand based on change in Price.
•Complementary
good – If the price of one good goes up the demand for its
complementary good will go down. Example: If the price of peanut butter goes up,
people will buy less jelly. Goods that go together, like cookies and cream.
•Inferior
good – Goods for which the demand falls when income rises
•Equilibrium
•Shortages
•Surplus
price –Quantity demanded is equal to quantity supplied at a given Price.
– Demand is greater than the supply.
– Supply is greater than demand.
Explain the difference between law of demand and law of supply.
Demand –
As price increases, demand decreases and as price decreases the demand
for a good increases.
Supply – As price increases, supply increases and as price decreases the supply for a
good decreases.
Explain the difference between an elastic demand and an inelastic demand. Give
examples of each.
•Elastic demand– People can do without if price increases too much.
Example: Ice
Cream. If ice cream is priced too high, people will buy a different good for dessert.
•Inelastic demand – People cannot do without even if price increases.
Example:
Gasoline or a head light for your vehicle. People must have these goods.
1
What are three variables that determine demand of a product?
•Population
•Income
•Tastes and Preferences
What are four determinants of supply?
•Price of inputs
•Technology
•Number of competitors
•Taxes
Use these numbers to plot a demand curve.
Price Quantity Demanded
5
20
10
15
13
10
17
5
20
2
Use these numbers to plot a supply curve.
Price Quantity Supplied
2
8
4
10
6
12
8
15
Use these numbers to plot the market clearing price/price equilibrium.
Price Quantity demanded Quantity supplied
5
100
10
10
90
20
15
60
40
20
40
60
25
20
100
From the previous question, what is the market clearing price?
____
2