Supply and Demand Study Guide 2014 Answers.
1. A decrease in resources will lead to a decrease in the supply of products.
2. The Law of Demand compared the change in quantity demanded to the change in price of a
good. As the price of a Coke increases from $1.29 to $2.29, the quantity demanded will
decrease.
3. An increase in demand will lead to an increase in price and an increase in quantity.
(see your notes)
4. An increase in supply will lead to a decrease in price and an increase in quantity.
(see your notes)
5. The five shifters of demand are: # of consumers, taste and preference, income (normal and
inferior goods), price of related goods (substitutes and complements), and future expectations.
a. Population increase leads to increase in demand
b. Popularity of iPhone 6 increases demand
c. An increase in income leads to a decrease in demand for Spam
d. An increase in the price of peanut butter leads to a decrease in demand for jelly
e. An advertized end of year clearance sale on F150s next month leads to a decrease in
demand for trucks this weekend.
6. As price falls, Qd increases, but demand does not change (price does not shift the curve)
7. Minimum Wage is an example of a price floor. A price floor leads to a surplus because it is
placed above equilibrium.
8. As the price of an item increases, demand for its substitutes also increases.
9. Price floors keep prices above equilibrium and leads to a surplus of goods in the market.
10. An equal increase in supply and demand would lead to an increase in Qe and Pe would be the
same or indeterminate.
11. The Law of Demand states that there is an inverse relationship between price and Qd…. As price
increases, Qd decreases, or as price decreases, Qd increases.
12. Because it is a necessary item with few substitutes and regardless of the price, people are going
to continue buying it.
13. A price ceiling keeps prices below equilibrium and results in shortages.
14. When businesses receive subsidies from the government, supply increases.
15. In most markets, equilibrium price and quantity are determined by the interaction of consumers
and producers.
16. Equilibrium price and quantity are shown on a supply and demand graph where the two curves
intersect.
17. The 6 shifters of supply are: # of producers, price/availability of resources, technology,
government action (subsidies/taxes), labor productivity, expectations for future profit.
a. New cereal company opens, supply of cereal increases
b. Minimum wage increases to $20 per hour, supply decreases
c. New cereal making machine is created, supply increases
d. Government taxes tobacco product producers, supply of Grizzly Wintergreen decreases
e. Addition of music to production floor leads to increased worker productivity; supply
increases
f. Company hears that demand for hot cereals increases during winter months, supply of
oatmeal decreases in August
18. Market clearing price is the price Qd = Qs. It is reached by the interaction of consumers who
want to spend as little as possible and producers who want to make as much money as
possible… the point at which they meet is the market clearing price.
19. In order for demand for a product to be inelastic, the product must be a necessity for which
there are few or no substitutes.
20. A price floor keeps prices for a good above equilibrium, while a price ceiling will keep prices
below equilibrium.