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1. What is demand? What is supply?

Demand: desire for certain good or service supported by the capacity to purchase it
Supply: the total amount of a product available for purchase at any specified price

2. State the Law of Demand and the Law of Supply.

Law of Demand: other things equal, the quantity demanded of a good falls when the price of the good
rises
Law of Supply: other things equal, the quantity supplied of a good rises when the price of the good rises

3. What are the non-price determinants of demand, and of supply?

Demand
o Income: the amount that a person or firm earns over a particular period
a rise in income will increase the demand for a normal good, and decrease the demand
for an inferior good
o Wealth: the total value of everything a person or firm owns, at a point in time, minus the total
amount owed
an increase in wealth will increase demand for a normal good, and decrease demand for
an inferior good
o Prices of related goods: two types of related goods substitute and complement
a substitute is a good that can be used in place of another good and that fulfils more or
less the same purpose while a complement is a good that is used together with some
other good
a rise in the price of a substitute increases the demand for a good, shifting the demand
curve to the right
a rise in the price of a complement decreases the demand for a good, shifting the demand
curve to the left
o Population: number of people occupying the same area
as the population increases in an area, the number of buyers will ordinarily increase as
well, and the demand for a good will increase
o Expected price: change in price over a certain amount of time
an expectation that price will rise in the future shifts the current demand curve rightward,
while an expectation that price will fall shifts the current curve leftward
o Tastes: the preference of the buyers
When tastes change toward a good, demand increases, and the demand curve shifts to
the right. When tastes change away from a good, demand decreases, and the demand
curve shifts to the left
o Government policy:
changes in direct taxes may affect the money that people have to spend, which in turn
affects the demand
o Seasons: general changes in the weather pattern that causes the seasonality of goods
changes in seasons may lead to change in pattern of demand in the economy, causing the
goods relevant to the season to shift to the right and the one unnecessary to the season
to shift to the left
Supply
o Input prices: prices of the raw materials used in order to produce a product
A fall in the price of an input causes an increase in supply, shifting the supply curve to the
right. On the contrary, a rise in the price of an input causes a decrease in supply, shifting
the supply curve to the left.
o Price of alternatives: two types of alternatives alternate goods and alternate market
Alternate goods are other goods that firms in a market could produce instead of the good
in question.
An alternate market is a market other than the one being analysed in which the same
good could be sold.
When the price for an alternative rises either an alternate good or the same good in an
alternate market the supply curve shifts leftward. On the contrary, a decrease in the
price of an alternate good will shift the supply curve rightward.
o Technology: a technological advance in production occurs whenever a firm can produce a given
level of output in a new and cheaper way than before
Cost-saving technological advances increase the supply of a good, shifting the supply
curve to the right
o Number of firms: number of sellers present in the market
An increase in the number of sellers shifts the supply curve rightward
o Expected price:
An expectation of a future price rise shifts the current supply curve leftward while an
expectation of a future price drop shifts the current supply curve rightward.
o Government policy:
changes in taxes imposed on a good would raise the cost of making and selling that good,
shifting the supply curve leftward
o Seasons:
Favourable weather increases crop yields, and causes a rightward shift of the supply curve
for that crop. Unfavourable weather destroys crops and shrinks yields, and shifts the
supply curve leftward.

4. Distinguish a movement along from a shift of the demand/ supply curve.

When we draw a demand/ supply curve, we assume all other variables that might influence demand/
supply are held constant at some particular value.
A change in any variable that affects demandexcept for the goods price causes the demand curve to
shift.
o Any change that increases the quantity demanded/ supplied at every price, shifts the demand/
supply curve to the right and is called an increase in demand/ supply.
o Any change that decreases the quantity demanded/ supplied at every price, shifts the demand/
supply curve to the left and is called a decrease in demand/ supply.
Movement along the demand/ supply curve represents a change in the price of a good.

5. What is a ceiling price? What is a floor price?


To prevent abuses in the market, the government interferes by setting a ceiling price and a floor price to
protect both the buyer and the seller.
o Ceiling price: a government-imposed maximum price in a market
o Floor price: a government-imposed minimum price in a market