Question

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Answer each question in a thorough, well-supported and explained response.
1. Define demand. What does the law of demand state? Express it in words, in symbols (clip art or images), and as a graph.

2. Define supply. What does the law of supply state? Express it in words, in symbols (clip art or images), and as a graph.

3. Discuss the five factors that cause demand curves to shift and give a specific example of each one.

4. Describe the five factors that shift the supply curve and what causes a movement along the supply curve.

5. What does it mean when a supply curve shifts to the left? Shifts to the right? Compare a shift of the curve to a movement along the curve.

6. Define elasticity of demand and describe how it is calculated; give examples of elastic and inelastic goods.

7. Describe equilibrium three ways: in words, with symbols, and as a labeled graph.

8. Describe how price acts as a signal in the marketplace to buyers and sellers.

Answer 1

Demand: The quantity of a product or service consumers are willing and able to buy at a given price. The law of demand states that as price increases, quantity demanded decreases, and as price decreases, quantity demanded increases. (Graph: Downward-sloping curve)

Supply: The quantity of a product or service producers are willing and able to sell at a given price. The law of supply states that as price increases, quantity supplied increases, and as price decreases, quantity supplied decreases. (Graph: Upward-sloping curve)

Factors shifting demand curves: Changes in consumer income, prices of related goods, consumer tastes and preferences, population, and consumer expectations. Example: Increase in income leads to increased demand for luxury goods.

Factors shifting supply curves: Changes in input prices, technology, number of suppliers, government policy, and natural conditions. Example: Decrease in input prices leads to increased supply.

Left shift of supply curve: Quantity supplied decreases at every price level. Right shift of supply curve: Quantity supplied increases at every price level. Movement along the supply curve occurs due to changes in price, resulting in a change in quantity supplied.

Elasticity of demand: Measures the responsiveness of quantity demanded to changes in price. Calculated as the percentage change in quantity demanded divided by the percentage change in price. Elastic goods have a large responsiveness to price changes (e.g., luxury goods), while inelastic goods have a small responsiveness (e.g., essential goods like food and medicine).

Equilibrium: A state of balance where quantity demanded equals quantity supplied. Symbolized as Qd = Qs. Graphically, it is the point where the demand and supply curves intersect.

Price as a signal: In the marketplace, price acts as a signal to buyers and sellers. Higher prices indicate increased demand and scarcity, leading to increased production. Lower prices signal reduced demand and surplus, leading to decreased production. Prices guide the allocation of resources and influence buying and selling decisions.