Download Chapter 4 Supply and Demand 1. Demand a. Law of Demand: The

Chapter 4
Supply and Demand
1.
Demand
a. Law of Demand: The quantity of a good that people are willing and able
to buy is negatively related to its price, ceteris paribus.
b. Why?
i. Income Effect
ii. Substitution Effect
c. “Needs”
i. Literally: Requirements
ii. Commonly: Desires/Wants
d. Demand Schedule
e. Market Demand = Sum of Individual Demands
2. Supply
a. Law of Supply: The quantity of a good offered for sale is positively
related to its price, ceteris paribus.
b. Why? More reward for doing so.
c. What Firms Do:
i. Buy/rent resources (labor, capital, land, materials, etc.)
ii. Combine into good or service
iii. Sell
iv. Profit = Sales Revenue – Cost of Resources
d. Supply Schedule
3.
Market Equilibrium
a. Definition: No Tendency for Change
b. Quantity Demanded at P* = Quantity Demanded at P*
i. If actual P > P*, then QD < QS (“Excess Supply” or “Surplus”)
=> P fall
ii. If actual P < P*, then QD > QS (“Excess Demand” or “Shortage”)
c. Changes in Equilibrium P & Q
i. Result from Shifts in Demand and Supply
4.
Shifts in Demand and Supply
a. Demand Shifters
i. Income
ii. Prices of Related Goods
1. Substitutes
2. Complements
iii. Tastes/Information
iv. Expectations
b.
Supply Shifters
i. Input Prices
ii. Technology
iii. Expectations
iv. Natural Disasters
c.
Four Steps to the Right Answer
i. Sketch a S&D graph
ii. Decide which (or both) curves shift
iii. Decide which way it (they) shift
iv. Observe the change in P*, Q* on your graph.
5. How Prices Allocate Goods and Services
a. High Prices Signal
i. Low supply – great scarcity
ii. High demand – great value to buyers of additional quantity
b. High Prices create Incentives
i. Sellers: Increase Quantity Supplied (Profitable)
ii. Buyers: Conserve, Limit Purchases, Reduce Q Demanded
Sample Questions
____ 15. An example of complementary goods would be
a. hamburgers and hot dogs.
b. lawnmowers and automobiles.
c. hamburgers and fries.
d. Coke and Pepsi.
____ 16. According to the law of demand price and quantity
a. supplied are inversely related.
b. demanded are inversely related.
c. demanded are positively related.
d. supplied are positively related.
____ 17. The positive relationship between price and quantity supplied is called
a. a market.
b. a change in supply.
c. the demand curve.
d. the law of supply.
Figure 4-7
____ 18. Refer to Figure 4-7. At a price of $35,
a. there would be a shortage of 400 units.
b. there would be a surplus of 200 units.
c. there would be a surplus of 400 units.
d. the market would be in equilibrium.
____ 19. An early frost in the vineyards of Napa Valley would cause
a. an increase in the demand for wine, increasing price.
b. an increase in the supply of wine, decreasing price.
c. a decrease in the demand for wine, decreasing price.
d. a decrease in the supply of wine, increasing price.
____ 20. When supply and demand both increase, equilibrium
a. price will increase.
b. price will decrease.
c. quantity may increase, decrease, or remain unchanged.
d. price may increase, decrease, or remain unchanged.
____ 21. What will happen to the equilibrium price and quantity of new cars if the price
of gasoline rises, the price of steel rises, public transportation becomes cheaper and more
comfortable, and auto-workers negotiate higher wages?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. Quantity will rise and the effect on price is ambiguous.