Supply and Demand Answers

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Supply and Demand

1. What is the Law of Demand? When the price of a good rises the Quantity demanded of the good will fall; ceteris
paribus; refers to the inverse relationship between price and quantity demanded.
2. What factors determine Demand? Price, Income, Prices of Related goods, Tastes and Preferences, Expectations,
and Number of Buyers.
3. What is Supply? The relationship between the price of a good and the quantity that sellers are willing and able to
produce and sell.
4. What factors determine Supply? Price, Input Prices, Technology, Expectations, Government, and Number of
Sellers.
5. What is equilibrium? Quantity Demanded = Quantity Supplied
6. What is a surplus? Quantity Supplied exceeds Quantity Demanded; excess supply
7. When a surplus exists, what drives the market toward equilibrium? Price must fall, sellers begin to reduce price to
eliminate excess supply, as price falls, quantity demanded rises, quantity supplied falls and the surplus gets smaller
until market obtains equilibrium.
8. What is a shortage? Quantity Demanded exceeds Quantity Supplied, excess demand
When a shortage exists, what drives the market toward equilibrium? Price must rise, buyers begin to bid up the price
to obtain the good, as price rises, quantity demanded falls, quantity supplied rises and the shortage gets smaller until
market obtains equilibrium.
9. Draw a demand curve and illustrate a change in quantity demanded.
P
Movement along a single demand curve
D
Q
10. What factor directly changes quantity demanded? Price
11. Draw a demand curve and illustrate a change in demand.
P
Shift to a new demand curve
D
D
12. What factors cause a change in demand? A change in any factor except price; income, prices of related goods,
tastes and preferences, expectations, or number of buyers.
13. Draw a supply curve, S1 and a second supply curve, S2 that represents an increase in supply.
P
S
S2
Q
14. Give three examples that cause supply to increase.
Input prices fall, advance in technology, sellers expect price will fall, change in government policy (reduce tariffs,
add subsidies, etc.), more sellers
15. Explain the difference between change in quantity supplied and change in supply. Change in quantity supplied
refers to a movement along a supply curve due to a change in the price of a good, change in supply refers to a shift
in the supply curve due to a change in any factor affecting supply, except the price of a good.
Use Supply and Demand Analysis to analyze the following situations. For each one draw a graph and label it,
mark the initial equilibrium. Do the analysis. For each event tell: 1) whether there in an increase in demand,
decrease in demand, increase in supply, or decrease in supply, show the effect on your graph. Then locate the
new equilibrium and tell 2) whether equilibrium price increases or decreases, and 3) whether equilibrium
quantity increases or decreases.
Market for Coffee:
1) A freeze destroys part of the coffee crop in South America.
2) There is a new trendy craze, college students are drinking Chai tea. (Assume coffee and tea are
substitutes.)
3) A new machine makes it easier to pick coffee beans.
4) You get a raise at work.
5) The price of doughnuts rises. (Many people consume coffee with their doughnuts.)
6) The government imposes a tariff on foreign grown coffee.
Write your answers on a Separate Sheet of Paper and submit them as homework. For each one you should
have a graph like the one below, show the effect labeled as D2 or S2, and list the answers 1-3.
1. Demand/Supply increases/decreases
2. Price increases/decreases
3. Quantity increases/decreases
P
S
P1
D
Q1
Market for Coffee:

1) A freeze destroys part of the coffee crop in South America.
2) There is a new trendy craze, college students are drinking Chai tea. (Coffee and tea are substitutes.)
3) A new machine makes it easier to pick coffee beans.
4) You get a raise at work.
5) The price of doughnuts rises. (Many people consume coffee with their doughnuts.)
6) The government imposes a tariff on foreign grown coffee.
1.
2.
Supply ______________ Demand _______________
Supply ______________ Demand _____________
Price _______________ Quantity ______________
Price ________________ Quantity _____________
3.
4.
Supply _____________ Demand ______________
Supply ______________ Demand _____________
Price _______________ Quantity ______________
Price _______ ________ Quantity _____________
5.
6.
Supply ____________ Demand ______________
Supply ______________ Demand _____________
Price _______________ Quantity _____________
Price ________________ Quantity _____________

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Name:______________________________________

Supply and Demand

Movement along a single demand curve

Shift to a new demand curve

Market for Coffee:

Supply Demand _

Supply __ Demand _

Price _ Quantity

Price ____ Quantity _

Supply _ Demand __

Supply __ Demand _

Price _ Quantity

Price _ Quantity _______

Supply Demand __

Supply __ Demand _

Price ___ Quantity _

Price ____ Quantity _

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