Unit 2 Review Sheet

Module 5: Intro to demand

Definitions
Competitive market:​ a market where there are many buyers and sellers wanting the same
good/service.
Demand schedule: ​a table showing how much of a good/service people are will buy at different
prices.
Demand curve: ​a graphical representation of what is shown in the demand schedule, showing
relation between quantity demanded and price.
Law of demand: ​the higher the price of a good/service leads people to want a smaller quantity
of it, while all other things being equal.
Quantity demanded: ​caused by a change in price, a shift ALONG the demand curve.

Factors that cause a SHIFT of the demand curve (M.E.R.I.T)

1) Change in ​market size

❖ Individual demand curve: relation between quantity demanded and price for an
individual consumer
❖ Market demand curve: combined quantities demanded by all consumers in the
market depending on a certain price
❖ An increase in consumers leads to an increase in demand, rightward shift of
demand curve
❖ A decrease in consumers leads to a decrease in demand, leftward shift of demand
curve

2) Change in ​expectations
❖ Expectations for a future drop in price of a good leads to a decrease in demand
today, leftward shift of demand curve
❖ Expectations for a future rise in price of a good leads to an increase in demand
today, rightward shift of demand curve
❖ Income also… if you expect your income to rise, you will borrow today and
increase demand; if you expect your income to fall, you are likely to save today
and reduce your demand

3) Change in ​related prices

❖ Substitute: a pair of goods are substitutes if a rise in the price of one of the goods
leads to an increase in demand for the other good (ex: hamburgers & hotdogs)
❖ Complement: two goods are complements if the rise in the price of one of the
goods leads to a decrease in demand for another good
➢ Usually consumed together (ex: toothbrush & toothpaste)

4) Change in​ income

❖ A rise in consumer incomes will cause the demand curve for “most” goods to shift
to the right
❖ “Most” goods are Normal goods: the demand for them increases when consumer
income rises
❖ The rest of the goods are Inferior goods: the demand for them decreases when
consumer income rises

5) Change in ​taste
❖ When the taste changes in favour of a good, more people are willing to buy it at
any given price, so demand curve shifts to the right
❖ When the taste changes against a good, fewer people want to buy it at any given
price, so the demand curve shifts to the left

Module 6: Intro to Supply

Definitions
Quantity supplied:​ caused by a change in price, represented by a shift ALONG the supply
curve.
Supply schedule: ​a table showing how much producers are willing to supply of the good at
different prices.
Supply curve: ​graphically represents a relationship between quantity supplied and price.
Law of supply: ​price and quantity supplied of a good is related, while all other things being
equal.
Inputs: ​anything that can be used to produce and output (good/service)
Supply:​ the amount of a product that suppliers are able and agreeing to sell at various prices
Factors that cause a SHIFT of the supply curve (T.I.R.E.S)

1) Change in ​technology
❖ Technological advancements allow suppliers to make more product with the same
resources, thus, making them more efficient and reducing the manufacturing costs

2) Change in prices/availability of ​inputs

❖ A decrease in input prices allows for more resources to be purchased by the
supplier, thus, causing an increase in supply (rightward shift of the supply curve)
❖ An increase in input prices allows for fewer resources to be purchased by the
supplier, thus, causing a decrease in supply (leftward shift of the supply curve)

3) Change in price of ​related​ goods or services

❖ If the costs of substitute goods increase then more suppliers will shift to
producing these goods

4) Change in ​expectations
❖ If an increase is expected in the future prices of a good/service then supply today
would decrease, therefore, causing a leftward shift (decrease) of the supply curve
❖ If a decrease is expected in the future prices of a good or service then supply
today would increase, therefore, causing a rightward shift (increase) of the supply
curve

5) Change in number of ​sellers

❖ If there is space in the market to make money, more sellers will feel like they
should enter that market
❖ More product supplied in a market due to an increased number of suppliers causes
supply to INCREASE
❖ Less product supplied in a due to a decreased number of suppliers causes supply
to decrease

6) Additional shifter - government ​taxes​ and ​subsidies

❖ Taxes are added to the existing manufacturing costs that a supplier has, thus,
causing less product to be supplied because the money for resources now has to
be used to pay taxes
❖ Subsidies are when part of the total cost of supply is covered by the government,
thus, allowing for more product to be produced because there is an increase in the
money on hand for purchasing resources
Producer/Consumer Surplus

Producer Surplus: ​The difference between the price

a seller receives for their good or service and the cost
the seller endures to produce that unit.

Consumer Surplus: ​The difference between the

amount a person is willing/able to pay for a good and
the actual amount paid for that unit.

Formula: ½ b x h

Module 7: Equilibrium

Definitions
Equilibrium: ​the point at which quantity supplied and quantity demanded are equal.
Shortage:​ is when quantity demanded of a good exceeds the quantity supplied.
Surplus:​ is when quantity supplied of a good exceeds the quantity demanded.
Disequilibrium

Increases and decreases in supply and demand

When demand increases, the equilibrium P and Q

increases
(opposite occurs when it decreases)

When supply increases, the equilibrium P decreases and

Q increases

(opposite occurs when it decreases)

Increases and decreases in BOTH supply and demand

An increase in demand and supply causes an increase

in quantity and price is undetermined.

A decrease in demand and supply causes a decrease in

quantity and price is undetermined.

An increase in demand and a decrease in supply

causes price to increase and quantity to be
undetermined.

A decrease in demand and an increase in supply

causes price to decrease and quantity to be
undetermined.
Module 8: Price Controls
Definitions
Price control: ​restrictions enforced by the law on how high or low a market price can go.
Price ceiling: ​a maximum limit on the price of a good or service that is enforced by the law
Price floor: ​a minimum limit on the price of a good or service that is enforced by the law
Black market: ​a market where services and goods are purchased and sold illegally
Incidence of a tax: ​how the tax is going to be shared between the participants in the market. (ex:
buyers and sellers)

How price ceilings affect market outcomes

The equilibrium price is above the price ceiling,

therefore, making the equilibrium price illegal
because it is above the maximum
price ceiling.

The price ceiling is a ​binding constraint ​on the

price in this situation and causes a ​shortage.

The equilibrium price is below the price ceiling,

therefore, making the equilibrium price legal because
it is below the maximum price ceiling.

The price ceiling is ​not binding ​on the price in this

situation.
How price floors affect market outcomes

The equilibrium price is below the price floor, therefore,

making the equilibrium price illegal because it is below
the minimum price floor.

The price floor is a ​binding constraint​ on the price in

this situation and causes a ​surplus.​

The equilibrium price is above the price floor, therefore,

making the equilibrium price legal because it is above the
minimum price floor.

The price floor is ​not binding​ on the price because it has no

effect on the outcome of the market.

Elasticity

Case 1 - Supply is more elastic than demand

● In a market where buyers pay the majority of the tax imposed, it is easier for the seller to
leave the market

Case 2 - Demand is more elastic than supply

● In a market where sellers pay the majority of the tax imposed, it is easier for the buyer to
leave the market
Review Questions

1. Explain whether each of the following events is a change in demand OR a movement

along the demand curve. If there is a shift, determine which factor is affected.
a. A rise in the price of oreos leads oreo consumers to start purchasing chocolate
chip cookies.
b. More people are changing their preferences from Blackberries to Iphones.
c. The decrease in price of Honda Civics leads to more people buying this kind of
car.

2. A decrease in the price of laptops will lead to a(n)...

a. Increase in demand for laptops
b. Decrease in the supply for laptops
c. Increase in the quantity of laptops demanded
d. Increase in the quantity of tablets demanded

3. Explain whether each of the following events is a change in supply OR a movement

along the supply curve. If there is a shift, determine which factor is affected.
a. Farmers receive new machinery to help with corn production.
b. The price of Yeezys increases from $750 to $1000.
c. The cost of cotton increases for t-shirts in the clothing production industry.

4. If A and B are substitutes in production, what would happen if the price of B increases…
a. The quantity supplied for A increases
b. The demand for B would decrease
c. The supply of A decreases
d. The demand for A and B increases

5. Draw a correctly labeled graph showing the nike shoe market in equilibrium. On your
graph, show the effect on equilibrium price and quantity in the market for shoes if the
wages of the workers manufacturing the shoes increases.

6. For each of the following scenarios, explain how the indicated change affects supply or /
and demand for the good in question and how the shift you describe affects equilibrium
price and quantity.
a. In the orange juice industry, a technological advancement was made that juiced
2x as many oranges in the same amount of time as before. However, in this
particular market apple juice costs less making it the more preferred choice of
consumption.
b. The wages in the car industry have increased.
c. A person is hired at a new job with a higher salary causing him to buy a car
instead of taking public transit.

7. Draw a binding price ceiling and price floor. Show whether there is a shortage or a surplus.

8. The graph shows the supply and demand in the pen

market. State the equilibrium price and quantity. Show the
effect on the graph if the government imposes a $2 tax on
the sellers. How much of this tax is paid by each side?

Answer key

1. a. Change in demand, determinant is related prices (substitutes)

b. Change in demand, determinant is taste
c. Change in quantity demanded, price

2. c

3. a. Change in supply, technology

b. Change in quantity supplied
c. Change in supply, input prices

4. c

5.
6. a. Increase supply for orange juice and decrease demand for orange juice, causing price
decreases and quantity is undetermined.
b. Decrease in supply, causing an increase in price and decrease in quantity.
c. Increase in demand, causing an increase in price and quantity.

7.

8.