Supply & Demand Basics
What happens to quantity demanded when price decreases?
Quantity demanded increases.
At equilibrium, what two quantities are equal?
Quantity supplied and quantity demanded.
What is it called when quantity demanded exceeds quantity supplied?
A shortage.
Which market structure is modeled by the supply and demand X model we have been practicing?
Perfect competition.
What is a government-imposed maximum price called?
Price Ceiling
To the right.
If demand increases, what happens to equilibrium price and quantity?
Both price and quantity increase.
What happens to prices when there is a surplus?
Prices fall.
Which market structure has many firms selling similar but not identical products?
Monopolistic competition.
Give an example of a price ceiling.
Rent control in NYC.
What is a term for goods that are best consumed together?
Complements
Equilibrium is $8. Companies are charging $10 for their products. Describe what is happening here.
The market is in disequilibrium; There will be a surplus; Sellers will have to reduce the price to get back to efficiency.
A price is set above equilibrium is required. What is likely going to happen?
A surplus.
Quality, Healthy ingredients, Price, Customer service, Brand association, Features, Customization, or any others approved by Doc D
A price floor for corn is set to $1.00 per ear. Who does this benefit? Explain.
The producers, so that other new companies can't "undercut" the current producers. This policy helps to guarantee that the producers are able to sell their products for a reasonable, profit-potential price.
If a product’s price increases by 20% and quantity demanded falls by 5%, what does this tell you about its price elasticity of demand?
5%/20% = 0.25 -- The product is inelastic.
A new technology allows car manufacturers to produce cars at a lower cost. At the same time, consumer incomes rise, increasing demand for luxury cars. Predict the change in equilibrium price and quantity.
Supply increases (price ↓, quantity ↑), demand increases (price ↑, quantity ↑). Net effect: equilibrium quantity increases, price is indeterminate.
Quantity demanded is 70. Quantity supplied is 100. How do sellers respond?
Sellers will reduce the product price to increase appeal.
List the 4 key variables we use to determine the market structure of an industry.
Number of Firms, Differentiation of Products, Price Taker or Maker, Barriers to Entry & Exit
The government establishes a minimum price of $10 for milk. The equilibrium price is $12. Explain what is happening next.
It’s nonbinding because the floor is below equilibrium. It doesn’t prevent the market from operating at the higher equilibrium price, so nothing changes. Sellers would be able to continue selling at equilibrium.
What happens to the demand curve when the price of an input rises? (Include direction.)
There is a movement along the line to the left.
A government offers a subsidy to both consumers and producers for the sale and purchase of solar panels. What happens to price and quantity?
Price is indeterminate, Quantity increases.
Explain how markets naturally eliminate shortages or surpluses.
Prices adjust (rising in a shortage, falling in a surplus), bringing the market back to equilibrium.
Describe antitrust laws. Give 2 of the 3 antitrust laws that the United States have implemented in the past 150 years.
Antitrust laws are federal statutes that promote competition and prevent monopolies by regulating business conduct and mergers. The three core federal antitrust laws are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914.
Why do economists often oppose price ceilings and floors?
They create inefficiencies, shortages or surpluses, and prevent markets from reaching equilibrium.