Question

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

1. Demand:

Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period. The law of demand states that, all else being equal, as the price of a product decreases, the quantity demanded for that product increases, and conversely, as the price increases, the quantity demanded decreases.

- In words: As price falls, quantity demanded rises; as price rises, quantity demanded falls.

- In symbols:

`\sf{(P \downarrow \Rightarrow Q_d \uparrow), (P \uparrow \Rightarrow Q_d \downarrow)}`

- Graph: The demand curve slopes downward from left to right.

2. Supply:

Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period. The law of supply states that, all else being equal, as the price of a product increases, the quantity supplied of that product also increases, and vice versa.

- In words: As price rises, quantity supplied rises; as price falls, quantity supplied falls.

- In symbols:

`\sf{(P \uparrow \Rightarrow Q_s \uparrow), (P \downarrow \Rightarrow Q_s \downarrow)}`

- Graph: The supply curve slopes upward from left to right.

3. Factors Shifting Demand Curves:

a) Income: When consumer income increases, the demand for normal goods rises (e.g., luxury items). For inferior goods, demand decreases (e.g., generic brands).

b) Price of related goods: Substitutes' price increase leads to increased demand (e.g., if tea price rises, coffee demand increases). Complements' price increase leads to decreased demand (e.g., hot dog buns and sausages).

c) Tastes and preferences: Favorable changes increase demand (e.g., health consciousness increases demand for organic foods).

d) Consumer expectations: Positive expectations about future prices or income increase demand.

e) Number of consumers: An increase in the population or market size raises demand for goods.

4. Factors Shifting Supply Curve:

a) Production costs: If input prices rise, supply decreases (left shift); if costs fall, supply increases (right shift).

b) Technological advancements: Improved technology reduces production costs, leading to increased supply.

c) Taxes and subsidies: Higher taxes reduce supply, while subsidies increase it.

d) Changes in producer expectations: Favorable expectations of higher prices decrease current supply.

e) Number of suppliers: More suppliers entering the market increase supply, while exit decreases it. Movement along the supply curve occurs due to price changes.

5. Shift to the Left vs. Shift to the Right:

A leftward shift of the supply curve indicates a decrease in supply due to factors like increased production costs. A rightward shift suggests an increase in supply due to factors like reduced production costs or improved technology.

Comparing a shift to a movement along the curve: A shift indicates a change in supply/demand due to external factors, while a movement along the curve is a response to a price change while other factors remain constant.

6. Elasticity of Demand:

Elasticity of demand measures how responsive the quantity demanded of a good is to changes in price. It's calculated as the percentage change in quantity demanded divided by the percentage change in price.

Examples:

- Elastic goods: Luxury cars, vacations, where consumers are responsive to price changes.

- Inelastic goods: Basic necessities like salt, medications, where consumers tolerate price changes without significantly altering their demand.

7. Equilibrium:

Equilibrium is the point where the quantity demanded equals the quantity supplied in the market, leading to no tendency for prices to change further.

- In words: Quantity demanded = Quantity supplied

- In symbols: (Q_d = Q_s)

- Graph: On a supply-demand graph, equilibrium is where the two curves intersect.

8. Price as a Signal:

In the marketplace, prices act as signals that convey information to both buyers and sellers. When prices rise, it signals scarcity, encouraging suppliers to produce more and consumers to buy less. When prices fall, it indicates abundance, encouraging consumers to buy more and suppliers to produce less. This interplay helps balance supply and demand, leading to market equilibrium.

Answer 2

1. Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price. The law of demand states that as the price of a good or service increases, the quantity demanded decreases, and vice versa.

2. Supply is the quantity of a good or service that producers are willing and able to sell at a given price. The law of supply states that as the price of a good or service increases, the quantity supplied increases, and vice versa.

3. The five factors that shift demand curves are changes in consumer income, prices of related goods, consumer tastes and preferences, number of consumers, and consumer expectations.

4. The five factors that shift the supply curve are changes in production costs, technology, prices of related goods, number of producers, and producer expectations. A movement along the supply curve occurs when the price of a good changes.

5. A leftward shift of the supply curve means that the quantity supplied of a good has decreased at every price level, while a rightward shift means that the quantity supplied has increased. A movement along the supply curve occurs when there is a change in the price of a good.

6. Elasticity of demand measures how much the quantity demanded changes in response to a change in price. Elastic goods have a large effect on quantity demanded, while inelastic goods have a relatively small effect.

7. Equilibrium occurs when the quantity demanded equals the quantity supplied. It can be represented as Qd = Qs and illustrated graphically where the demand and supply curves intersect.

8. Price acts as a signal in the marketplace, signaling to producers to increase or decrease production and to consumers to increase or decrease demand. This helps to allocate resources efficiently.