Individual Markets
Demand & Supply
True or False :
1. The law of demand states that, ceteris paribus, there is an inverse relationship
between the price of a good and the quantity demanded of the good .
2. If two goods are substitutes, a decline in the price of one will cause an increase
in the demand for the other .
3. An increase in consumer incomes will cause a decrease in the demand for an
inferior good .
4. If two goods are complements, a decline in the price of one will cause an
increase in the demand for the other .
5. The law of supply states that, ceteris paribus, there is an inverse relationship
between the price of a good and the quantity supplied of the good .
6. The development of a new production technique that lowers the cost of
producing product X will shift the supply curve of product X to the right .
7. An increase in the supply of product X, with demand held constant, will
increase the price of product X .
8. A surplus indicates that the quantity demanded is greater than the quantity
supplied at that price.
9. A price fixed above the equilibrium price of a product will cause a shortage of
that product .
10. An increase in supply and demand will lead to an increase in the equilibrium
price and an indeterminate change in the equilibrium quantity .
11. A price fixed below the equilibrium price of a product will cause a shortage of
that product .
12. When the market for a good is in equilibrium, this means that the supply and
demand are equal .
Multiple Choice Questions:
1. Which will cause the demand for hamburger to increase ?
A)
a decrease in the price of hamburger
B)
an increase in the price of catsup, which is a complementary good
C)
an increase in the price of pizza, which is a substitute good
D)
a decrease in the price of feed (grain), which is used to produce
hamburger
2. Which will change only the quantity demanded of oranges ?
A)
an increase in the population
B)
a change in the price of oranges
C)
a change in the price of tangerines
D)
a decrease in the income of consumers
3. Which will not cause a change in the demand for good X ?
A)
a change in tastes
B)
a change in income
C)
a change in the price of X
D)
a change in price of complementary product
Price of
Corn flakes
S
D0
D1
Quantity of
corn flakes
4. The shift of the demand curve in the diagram above may be attributed to :
A)
a fall in the price of Wheaties .
B)
a rise in the price of Corn Flakes .
C)
a change in tastes away from hot cereals .
D)
an increase in the average number of breakfast eaters.
5. A market demand schedule for a product indicates that :
A)
as the product's price falls, consumers buy less of the good .
B)
there is a direct relationship between price and quantity demanded .
C)
as a product's price rises, consumers buy less of other goods .
D)
there is an inverse relationship between price and quantity demanded .
6. When one speaks of "demand" in a particular market, this refers to :
A)
the quantity demanded at a given price .
B)
only one price-quantity combination on the demand schedule .
C)
only one point on the entire demand curve .
D)
the whole demand curve .
7. Other things being equal, the law of demand implies that as :
A)
the demand for CDs increases, the price will decrease .
B)
income increases, the quantity of CDs demanded will increase .
C)
the price of CDs increases, the quantity of CDs demanded will
decrease .
D)
the price of CDs increases, the quantity of CDs demanded will increase
8. A lower price increases the quantity demanded because :
A)
the purchasing power of individuals decreases .
B)
the financial assets of individuals decrease .
C)
individuals buy more of the product and less of a substitute .
D)
individuals buy less of the product and more of a substitute .
9. Which is consistent with the law of demand ?
A)
A decrease in the price of turkey sandwiches causes a decrease in the
quantity of turkey sandwiches demanded .
B)
A decrease in the price of tacos causes no change in the quantity of
tacos demanded .
C)
An increase in the price of pizza causes an increase in the quantity of
pizza demanded .
D)
An increase in the price of hamburgers causes a decrease in the
quantity of hamburgers demanded .
10. A result of a fall in the price of gasoline, consumers buy more gasoline and
take more driving vacations. This situation is an illustration of:
A)
the income effect.
B)
the substitution effect.
C)
diminishing marginal utility.
D)
the rationing function of prices.
11. As a result of the decrease in the price of hamburger, consumers buy more
hamburger and fewer frankfurters. This is an illustration of :
A)
consumer sovereignty .
B)
the income effect .
C)
the substitution effect .
D)
changing tastes and preferences .
12. Which statement best illustrates the concept of diminishing marginal
utility?
A)
For most people, an increase in the price of a bag of potato chips will
decrease the consumption of potato chips.
B)
The more bags of potato chips a person eats, the less additional
satisfaction the person gets from eating another bag.
C)
The number of bags of potato chips a person buys will diminish based
on the person's level of income.
D)
A person will continue to buy bags of potato chips until the cost of a
substitute product such as bags of popcorn falls in price.
13. Which is not a determinant of demand ?
A)
income
B)
the cost of inputs in production
C)
the prices of related goods
D)
future price expectations
14. If average income increases, ceteris paribus, then there will be :
A)
a shift of the demand curve .
B)
a movement along the demand curve .
C)
a movement along and a shift in the demand curve .
D)
no effect on the demand curve, because income is not a ceteris paribus
condition .
15. Which will not, ceteris paribus, cause the demand curve for good A to
shift ?
A)
a change in the price of A
B)
a change in the price of B, a complement
C)
a change in the price of C, a substitute
D)
an increase in average income
16. A normal good is one :
A)
which all people like .
B)
which all normal people like .
C)
for which demand increases when price decreases .
D)
for which demand increases when income increases .
17. An inferior good is one :
A)
that doesn't work .
B)
that costs too much .
C)
that won't be purchased at any price .
D)
for which demand increases as income decreases .
P
D2
D3
D1
Q
18. Refer to the above diagram, which shows three demand curves for coffee.
Which would cause the change in the demand for coffee illustrated by the
shift from D1 to D2 ?
A)
a decrease in the price of tea
B)
an increase in consumer incomes
C)
an increase in the price of sugar
D)
a technological improvement in the production of coffee
19. Refer to the above diagram, which shows three demand curves for coffee.
Which would cause the change in the demand for coffee illustrated by the
shift from D1 to D3 ?
A)
a decrease in the price of tea
B)
an increase in consumer incomes
C)
a decrease in the price of sugar
D)
a technological improvement in the production of coffee
20. If two goods are close substitutes:
A)
an increase in the price of one will decrease the demand for the other.
B)
an increase in the price of one will increase the demand for the other.
C)
a decrease in the price of one will increase the demand for the other.
D)
a decrease in the price of one will have no effect on the demand for the
other.
21. People demand more of product X when the price of product Y decreases.
This means X and Y are :
A)
complements .
B)
substitutes .
C)
not related .
D)
both inexpensive .
22. If the price of K declines, the demand curve for the complementary
product J will :
A)
remain unchanged .
B)
shift to the right .
C)
decrease .
D)
shift to the left .
23. The following show the relationship between the price of A and the
quantities of two other products , B and C , demanded .
d
d
QB
Price of A
QC
k.d 100
400
400
k.d 120
380
420
Refer to the above data. Which of the following is most likely to be true ?
A)
B and C are both substitute products for A .
B)
B and C are both complementary products for A .
C)
C is a substitute for A; B is a complement to A .
D)
C is a complement to A; B is a substitute for A .
24. The supply of a product does not depend on :
A)
Labor costs .
B)
The number of sellers in the market .
C)
Consumer’s tastes .
D)
Existing technology .
P
S
P1
P2
E1
E2
D1
D2
Q2
Q1
Q
25. Refer to the above graph, which shows the market for chicken where D1
and D2 represent different demand curves. A change from E1 to E2 is most
likely to result from :
A)
a decrease in consumer incomes .
B)
an increase in the wages of chicken workers .
C)
an increase in the price of beef products .
D)
improved technology in the chicken industry .
26. If the price of oil, a close substitute for coal, increases, then the:
A)
Supply curve for coal will shift to the right .
B)
Demand curve for coal will shift to the right .
C)
Equilibrium price and quantity of coal will not change .
D)
Demand curve for coal will shift to the left .
27. A market will experience a ---------- when the price is above equilibrium,
and a ---------- when price is below equilibrium .
A)
Shortage , Shortage .
B)
Surplus , Surplus .
C)
Shortage , Surplus .
D)
Surplus , Shortage .
Essays and Problems:

State the law of demand and explain why is the other-things-equal assumption
critical to it?

Give three explanations for the law of demand

What is the difference between a change in demand and a change in
quantity demanded?

Define “ Supply “ .

Given the products below and the events that affect them, indicate what
happens to demand or supply, and the equilibrium price and quantity. Identify
the determinant of demand or supply that causes the shift.
(a) Blue jeans. The wearing of blue jeans becomes less fashionable among
consumers.
(b) Computers. Parts for making computers fall in price because of
improvements in technology.
(c) Lettuce. Hurricane Salwa produces heavy rains that destroy a significant
portion of the lettuce crop.
(d) Chicken. Beef prices rise because severe winter
weather reduces cattle herds.

In the spaces below each of the following, indicate the [ increase (+),
decrease (-) ] on equilibrium price (P) and equilibrium quantity (Q) of
each of these changes in demand and /or supply .
P
Q
(a) Increase in demand, supply constant
(b) Increase in supply, demand constant
(c) Decrease in demand, supply constant
(d) Decrease in supply, demand constant
(1) Show how the demand curve for tea might be effected by the following variables
a) An increase in the price of coffee .
P
b)
Q
A decrease in the price of tea .
P
Q
c)
A decrease in consumers’ income .
P
Q
d)
Increase in the price of sugar .
P
Q
e)
Consumers prefer to drink more cocoa rather than tea .
P
Q
(2) What is going to happen to equilibrium quantity and price in the following cases:
a) A rise in supply larger than a rise in demand .
S
P
Equilibrium Quantity -------------Equilibrium Price ----------------
D
Q
b) A rise in supply while demand is fixed .
P
S
Equilibrium Quantity --------------Equilibrium Price ---------------D
Q
c) A rise in demand and a decrease in supply by less than the increase in demand .
P
S
Equilibrium Quantity -----------Equilibrium Price --------------D
Q
(3) Show how the supply curve will be effected by the following factors :
a) Increase in car prices
P
S
Q
b) Technological improvement in cars production
S
P
Q
c) Increase in wages
P
S
Q
(4) The following are some information about good X markets :
Price 1 2 3 4 5
52 60 68 76 84
QS
65 60 55 50 45
Qd
a) What is the equilibrium price and quantity?
b) If the government imposes a maximum price on that product equals to 1 kd per
unit, explain what will happen in this market? Draw a simple graph to explain the
maximum price effect.
c) If the government imposes a maximum price on that good equal to 4 kd per unit,
what will happen in that market?
(5) Suppose you have the following equations :
Q d  200  2 P
and
Q S   200 10 P
a) What is the equilibrium price and quantity?
b) If P = kd 45, is there a shortage or surplus? How big?
c) If P = kd 25, is there a shortage or surplus? How big?