1. What is a market, and how does it relate to supply and demand?
2. What are the characteristics of a perfectly competitive market? Give an example of a perfectly competitive market and explain why it is a perfectly competitive market.
3. Explain the law of demand. Give an example of how the law works using a product of your choice.
4. Explain how market demand is computed and give an example using a product of your choice.
5. Explain how changes in the price of related goods can shift the demand curve on a product of your choice. Include substitutes and complements in your answer.
6. Explain the law of supply. Give an example of how the law works using a product of your choice.
7. Explain how market supply is computed and give an example using a product of your choice.
8. Explain how changes in input prices can shift the supply curve on a product of your choice.
9. Explain what a surplus is and why a surplus happens in the market. How should sellers react to a surplus? Why?
10. Explain what a shortage is and why a shortage happens in the market. How should sellers react to a shortage? Why?
Sample Solution
1. What is a market, and how does it relate to supply and demand?
A market is a place or system where buyers and sellers interact to exchange goods and services.The interaction between supply and demand determines the price and quantity of goods and services traded in a market.
Supply:The quantity of a good or service that producers are willing and able to offer for sale at various prices.
Demand:The quantity of a good or service that consumers are willing and able to purchase at various prices.
2. Characteristics of a Perfectly Competitive Market
A perfectly competitive market has the following characteristics:
Many buyers and sellers: There are numerous buyers and sellers, none of whom have a significant market share.
Homogeneous products: All products are identical and have no distinguishing features.
Perfect information: All buyers and sellers have complete and accurate information about the market.
Free entry and exit:There are no barriers to entry or exit for firms.
Example: The market for agricultural commodities like wheat or corn is often considered perfectly competitive due to the large number of producers and consumers, the homogeneous nature of the products, and the relatively low barriers to entry.
3. Law of Demand
The law of demand states that as the price of a good or service increases, the quantity demanded decreases, ceteris paribus (all else being equal).
Example: If the price of coffee increases, consumers may reduce their coffee consumption and switch to cheaper alternatives like tea.
4. Market Demand
Market demand is the total quantity of a good or service demanded by all consumers in a market at a given price.It is calculated by summing the individual demand curves of all consumers.
Example: If there are two consumers in a market, one with a demand curve of Q1 = 10 – 2P and another with a demand curve of Q2 = 5 – P, then the market demand curve is Q = Q1 + Q2 = 15 – 3P.
5. Changes in the Price of Related Goods
Substitutes: If the price of a substitute good increases, the demand for the original good will increase (rightward shift of the demand curve). For example, if the price of tea increases, the demand for coffee may increase.
Complements: If the price of a complementary good decreases, the demand for the original good will increase (rightward shift of the demand curve). For example, if the price of printer ink decreases, the demand for printers may increase.
6. Law of Supply
The law of supply states that as the price of a good or service increases, the quantity supplied increases, ceteris paribus.
Example: If the price of wheat increases, farmers may be incentivized to produce more wheat by planting larger areas or using more efficient farming techniques.
7. Market Supply
Market supply is the total quantity of a good or service that producers are willing and able to offer for sale at a given price.It is calculated by summing the individual supply curves of all producers.
Example: If there are two producers in a market, one with a supply curve of Q1 = 3P and another with a supply curve of Q2 = 2P, then the market supply curve is Q = Q1 + Q2 = 5P.
8. Changes in Input Prices
If the price of an input used to produce a good or service increases, the supply curve will shift to the left (decrease in supply). Conversely, if the price of an input decreases, the supply curve will shift to the right (increase in supply).
Example: If the price of fertilizer used to produce wheat increases, the supply of wheat will decrease, leading to a leftward shift of the supply curve.
9. Surplus
A surplus occurs when the quantity supplied of a good or service exceeds the quantity demanded at a given price. Sellers may react to a surplus by:
Reducing prices: Lowering the price of the good or service to encourage more demand.
Decreasing production: Producing less of the good or service to bring supply in line with demand.
Finding new markets: Exploring alternative markets or channels to sell the surplus.
10. Shortage
A shortage occurs when the quantity demanded of a good or service exceeds the quantity supplied at a given price. Sellers may react to a shortage by:
Increasing prices: Raising the price of the good or service to reduce demand and increase supply.
Increasing production: Producing more of the good or service to meet the increased demand.
Rationing:Allocating the limited supply among consumers
