Supply, demand, equilibrium (chapt4 of textbook)

1. What is the market price?

Market price is the price that buyers and sellers conduct transactions

2. What are the assumptions made in a perfectly competitive market? In a perfectly

competitive market, we assume
- All sellers are selling the identical goods or services
- Any individual buyer or seller is not powerful enough to influence the market price. They
accept the market price and cant bargain for a better price

3. What are price takers?

Buyers and sellers who accept the market price. Buyers cannot bargain for lower prices and
sellers can't bargain for a higher price.

4. What is the quantity demanded?

Quantity demanded refers to the amount of goods and services that buyers are willing to
purchase at a given price

5. What is the Demand schedule?

A table that reports the quantity demanded at different prices.

6. What is the demand curve?

A demand curve plots the quantity demanded at different prices.

7. What is the law of demand?

Law of demand states that quantity decreases when price increases, quantity increases when
price decreases (inverse relationship) holding all else equal.
 8. Why is the demand curve downward sloping?
The demand curve is download sloping because of the inverse relationship between price and
quantity demanded. The higher the price, the lower the quantity demanded.

9. What is Willingness to pay?

Willingness to pay refers to the maximum amount a buyer is willing to buy for an extra unit of
good. The height of the demand curve at any quantity shows the amount that a buyer is willing
to pay for the marginal good.

10. Explain diminishing marginal benefit

Diminishing marginal benefits indicate that as consumers consume more of a good, their
willingness to pay for an extra unit decreases. Willingness to pay is negatively related to the
quantity I have.

11. What is aggregation?

The process of adding up individual behaviors.

12. What is aggregated quantity demanded?*

The process of adding up the quantity demanded of each buyer at a fixed price.

13. What is aggregated demand curve?*

Demand curve is aggregated by summing the quantity demanded at each price on an
individual’s demand curve.

14. What is a market demand curve?*

The sum of individuals’ buyers quantity demanded of all potential buyers. It plots the relationship
between market price and quantity demanded holding all else equal.

15. What is the difference between shift in demand curve and movement along the
demand curve?
The demand curve only shifts when quantity demanded changes at a given price due to non-
price determinants such as changes in tastes and preferences, income and wealth, number and
scale of buyers, availability and prices of related goods and buyers’ expectations about the
future income or price. If the goods prices on its own changes, it produces a movement along
the demand curve.

16. What are the factors that cause a shift in demand curve?
- Changes in taste and preferences: A change in what we enjoy, value or like. Eg your
consumption for oil will fall if you are concerned about global warming
- Changes in income and wealth: A change in income affects your ability to purchase
goods and services. Increase in salary = your willingness to pay is higher.
- Number and scale of buyers: No. of buyers increase, quantity demanded increase, vice
versa
 - Availability and prices of related goods: for eg, if a city increase price in cars, citizens
are likely to take public transport instead
- Buyers’ believe about the future income or price: if one foresees loss of job, he may be
more thrifty with his money.

17. How does a change in quantity demanded affect the demand curve?
- When quantity demanded decreases, demand curve shifts left
- When quantity demanded increases, demand curve shifts right

18. What are complements and substitutes?

- Two goods are complements when the increase in price of one good causes the
demand curve of the other good to shift left (eg, phones and charger)
- Two goods are substitutes when the increase in price of one good causes the demand
curve to shift right (ice cream and yoghurt)

19. What are normal and inferior goods?

- An increase in income will cause an increase in quantity demanded for a normal good
- An increase in income will cause a decrease in quantity demanded for an inferior good

20. What is the quantity supplied?

Quantity supplied refers to the amount of goods sellers are willing to sell at a given price

21. What is the supply schedule?

A supply schedule is a table that reports the quantity supplied at different prices holding all else
equal

22. What is the supply curve?

A supply curve plots the quantity supplied at different prices

23. What is the law of supply?

The law of supply states that quantity supplied rises when price rises holding all else equal.

24. Why is the supply curve upward sloping?

The supply curve is upward sloping because of the direct relationship between price and
quantity supplied. The higher the price, the higher the quantity supplied.

25. What is willingness to accept?

The lowest price a seller is willing to accept to sell an extra unit of good. At a particular quantity
supplied, willingness to accept is the height of the supply curve.

26. What is the market supply curve?*

A market supply curve plots the relationship between quantity supplied and market price holding
all else equal
 27. What is the difference between shift in supply curve and movement along the
supply curve?
The supply curve only shifts when quantity supplied changes at a given price due to non-price
determinants such as changes in input prices, changes in technology, number and scale of
sellers, and sellers’ expectations about the future income or price. If the goods prices on its own
changes, it produces a movement along the supply curve.

28. What are the factors that cause a shift in supply curve?
- Changes in input prices: when cost of production is lower, quantity supplied increases
- Changes in technology: improvement in technology can cause suppliers to supply more
goods,
- Changes in number and scale of sellers
- Changes in sellers’ beliefs on future

29. How does a quantity supplied affect the supply curve?

- When there is an increase in quantity supplied, supply curve will shift right
- When there is a decrease in quantity supplied, supply curve will shift left

30. What is competitive equilibrium?

Competitive equilibrium is the crossing point of the supply curve and demand curve. At the
competitive equilibrium point, the market comes to an agreement on competitive equilibrium
price and the competitive equilibrium quantity at that price. (quantity supplied=quantity
demanded)

31. What is a competitive equilibrium price?

Competitive equilibrium refers to the price at the crossing point of the supply and demand curve.

32. What is competitive equilibrium quantity?

Competitive equilibrium quantity refers to the quantity at the crossing point of supply and
demand curve.
 33. What is excess supply?
Excess supply occurs when suppliers provide more than what consumers want at a given price.
This results in surplus.

34. What happens when the market price is above the competitive equilibrium price?
The higher price makes selling more desirable and buying less desirable, raising the quantity
supplied above its competitive equilibrium level and lowering the quantity demanded below its
competitive equilibrium level. When the market price is above the competitive equilibrium price,
quantity supplied exceeds quantity demanded, creating excess supply.

35. What is excess demand?

Excess demand occurs when consumers want more than what suppliers provide at a given
price. This results in a shortage.
 36. What happens when the market price is below the competitive equilibrium price?
The lower price makes selling less desirable and buying more desirable, raising the quantity
demanded above its competitive equilibrium level and lowering the quantity supplied below its
competitive equilibrium level. When market price is below the competitive equilibrium price,
quantity demanded exceeds quantity supplied, creating excess demand.

37. How does a leftward shift in the supply curve affect the equilibrium quantity and
equilibrium price?
A leftward shift in the supply curve will result in a fall in equilibrium quantity as well as an
increase in equilibrium price.

38. How does a rightward shift in the supply curve affect the equilibrium quantity and
equilibrium price?
A rightward shift in the supply curve will increase the equilibrium quantity and lower the
equilibrium price.
 39. How does a leftward shift in the demand curve affect equilibrium quantity and
equilibrium price?
A leftward shift in the demand curve will decrease the equilibrium quantity and decrease the
equilibrium price.

40. How does the rightward shift in the demand curve affect equilibrium quantity and
price?
A rightward shift in the demand curve will increase equilibrium quantity and equilibrium price.
 Quiz
41. Explain how prices move towards competitive equilibrium in a market.
Prices move towards equilibrium due to the actions of buyers and sellers. When the prevailing
price does not equate to quantity supplied, it leads to excess supply or excess demand.

Excess supply/surplus will bring about a decrease in price via actions of buyers and sellers.
Intuitively, sellers are willing to lower their prices as they have unsold goods at the original price
and buyers are likely to ask for a lower price. As prices adjust down, the excess supply will
decrease until a new equilibrium price is reached where quantity supplied equates to quantity
demanded.

Excess demand/shortage will bring about an increase in price via actions of buyers and sellers.
Intuitively, buyers are willing to pay a higher price as they want higher quantity than what is
available at the original price, sellers are also likely to ask for a higher price. As prices adjust up,
the excess demand will decrease until a new equilibrium price is reached where quantity
demanded equates to quantity supplied.

42. How will a decrease in input cost affect the new equilibrium level?
A decrease in input costs will lead to a decrease in equilibrium price and increase in equilibrium
quantity. The upward sloping supply curve will shift right. As the downward sloping demand
curve is unchanged, the new intersection point gives a lower equilibrium price and higher
equilibrium quantity.

43. Suppose that the number of buyers in a market increases and a technological
advancement occurs, what will happen to the new equilibrium?
Equilibrium quantity will increase but equilibrium price is ambiguous. Increase in the number of
buyers will shift the demand curve to the right. Technological advancements reduce costs and
will shift the supply curve to the right. As a result, new equilibrium quantity increase. New
equilibrium prices may increase or decrease, depending on the relative rightward shift of the
respective supply and demand curve. If the demand curve shifts more than the supply curve,
the new equilibrium price will increase. If the demand curve shifts less than the supply curve,
the new equilibrium price will decrease.

44. Explain why higher price leads reduced quantity demanded

45. Explain why higher price leads increase in quantity supplied

Firms are willing to increase quantity supplied only at a higher price because they need to cover
their higher marginal costs.