Fill in the Blank[break]
#1 The law of demand states that (1)_____ and (2)_____ are inversely related.

Solution Show
[break]
#2 The difference between supply and quantity supplied is that supply refers to the entire (1)_____ while quantity supplied refers to a specific (2)_____.
Solution Show
[break]
#3 Price ceilings are only effective if they are placed (1)_____ the equilibrium price and price floors are only effective if placed (2)_____ the equilibrium price.
Solution Show
[break]
#4 The law of supply states that price and quantity are (1)_____ related.
Solution Show
[break]
#5 If at the current market price of $8, quantity demanded is 8,000 and quantity supplied is 3,500, then we have a (1)_____ of (2)_____.
Solution Show
[break]
#6 Graphically, to get a market demand curve from individual demand curves, we (1)_____ up the individual demand curves.
Solution Show
[break]
#7 If two goods are substitutes and the price increase for one, the demand will (1)_____ for the other.
Solution Show
[break]
#8 New sellers entering the market will cause supply to (1)_____.
Solution Show
[break]
#9 An increase in supply will cause the market price to (1)_____ and the market quantity to (2)_____.
Solution Show
[break]
#10 If two goods are complements and the price decreases for one, the demand will (1)_____ for the other
Solution Show
[break]
#11 When graphing demand, economists conventionally place (1)_____ on the Y-axis and (2)_____ on the X-axis.
Solution Show
[break]
#12 When graphing supply, economists conventionally place (1)_____ on the Y-axis and (2)_____ on the X-axis.
Solution Show
[break]
#13 Demand for normal goods varies (1)_____ with income while inferior goods vary (2)_____ with income.
Solution Show
[break]
#14 Graphically, to get a market supply curve from individual supply curves, we (1)_____ up the individual supply curves.
Solution Show
[break]
#15 An increase in taxes for a good will (1)_____ supply while an increase subsidies will (2)_____ supply.
Solution Show
[break]
#16 A decrease in demand will cause the equilibrium price to (1)_____ and the equilibrium quantity to (2)_____.
Solution Show
[break]
[break]
Multiple Choice[break]
#1 What are might be two possible reasons a consumer buys less of a product when the price has increased?
A. Income and the price of substitute goods have changed.
B. There have been changes in taxes and subsidies.
C. The Coriolis effect and the Magnus effect.
D. The income effect and the substitution effect.
Solution Show
[break]
#2 Which of the following are economists referring to when talking about supply?
A. The various quantities of a good or service that consumers are willing and able to purchase over a range of prices during a specified period of time.
B. The various quantities of a good or service that producers are willing and able to sell over a range of prices during a specified period of time.
C. All else equal, as price increases, quantity demanded decreases and as price decreases, quantity demanded increases.
D. All else equal, as price increases, quantity supplied increases and as price decreases, quantity supplied decreases.
Solution Show
[break]
#3 What effect will surpluses have on the market for a good?
A. Increase supply and increase demand of the good until the equilibrium price and quantity is reached.
B. Reduce supply and reduce demand of the good until the equilibrium price and quantity is reached.
C. Put pressure on prices to fall.
D. No effect
Solution Show
[break]
#4 Which of the following are economists referring to when talking about demand?
A. The various quantities of a good or service that consumers are willing and able to purchase over a range of prices during a specified period of time.
B. The various quantities of a good or service that producers are willing and able to sell over a range of prices during a specified period of time.
C. All else equal, as price increases, quantity demanded decreases and as price decreases, quantity demanded increases.
D. All else equal, as price increases, quantity supplied increases and as price decreases, quantity supplied decreases.
Solution Show
[break]
#5 Which of the following will not cause the supply of corn to change?
A. The price of wheat changes.
B. The number of people buying corn changes.
C. The government subsidization of corn changes.
D. The efficiency of corn harvesting changes.
Solution Show
[break]
#6 Which of the following will not cause the demand for blueberries to change?
A. The price of blackberries fall.
B. A blueberry diet craze sweeps the nation.
C. The price of blueberries is expected to change.
D. The price of blueberries changes.
Solution Show
[break]
#7 Which of the following represents an increase in quantity supplied in this graph?
Demand and Supply PS Graph 1
A. S1 to S2.
B. S2 to S1.
C. Point a to point b.
D. Point b to point a.
Solution Show
[break]
#8 You notice that the price of your favorite brand of cereal has risen. Which of the following might be a cause of the price rise?
A. The cost of producing cereal has fallen.
B. The prices of other similar cereals have risen.
C. Fewer people seem to be buying this brand.
D. The price of milk has risen.
Solution Show
[break]
#9 What are the market effects of increasing demand and decreasing supply at the same time?
A. Price increases, quantity decreases.
B. Price is indeterminate, quantity increases.
C. Price increases, quantity is indeterminate.
D. Price decreases, quantity increases.
Solution Show
[break]
[break]
Short Answer[break]
#1 What are the determinants of demand?
Solution Show
[break]
#2 What are the determinants of supply?
Solution Show
[break]
#3 What are the two endogenous variables in the demand model?
Solution Show
[break]
#4 What do economists call the ability for markets to be able to reach the market clearing price on its own?
Solution Show
[break]
#5 As a consumer, a rising product price makes purchasing other similar products relatively cheaper to me. What effect am I describing?
Solution Show
[break]
#6 Find the equilibrium price and quantity. If the government instituted a market price of $5, would this be a price ceiling or a price floor? What would be the resulting surplus or shortage?
Demand and Supply PS Graph 2
Solution Show
[break]
#7 How will improvements in production techniques affect supply? Why?
Solution Show
[break]
#8 What is the equation of this line? Is this line more likely to be a demand curve or a supply curve?
Demand and Supply PS Graph 3
Solution Show
[break]
#9 What is the equation of this line? Is this line more likely to be a demand curve or a supply curve?
Demand and Supply PS Graph 4
Solution Show
[break]
#10 As a consumer, a falling product price allows me to purchase more things with my given level of income. What effect am I describing?
Solution Show
[break]
#11 Computers and software are examples of what kind of goods?
Solution Show
[break]
#12 Fill in the following table. What is the equilibrium price and quantity?
Demand and Supply PS Table 1
Solution Show
[break]
#13 Your friend says to you, “In the market, when demand increases, price increase causing the quantity to increase. But the law of demand states that as prices go up, quantity should go down. Therefore, law of demand must be wrong.” Explain the flaw in his reasoning.
Solution Show
[break]
#14 Chicken and beef are examples of what kind of goods?
Solution Show
[break]
#15 What are the two endogenous variables in the supply model?
Solution Show
[break]
#16 Cell phone plans and butter are examples of what kind of goods?
Solution Show
[break]
#17 What effect will a change in resource prices have on supply? Why do resource prices affect supply at all?
Solution Show
[break]
#18 Suppose you are hired as an economist to analyze the market L-shaped couches. You notice that every year for the past five years, more and more L-shaped couches have been sold at lower and lower prices. What might be a possible explanation for this?
Solution Show
[break]
#19 Used cars are an example of what kind of goods?
Solution Show
[break]
#20 How do you know if a variable is endogenous or exogenous?
Solution Show
[break]
#21 What effect will a change in producer expectations have on supply?
Solution Show
[break]
#22 Suppose we are at the equilibrium level for some good. If the consumers of this product have their incomes increase, what will happen to the equilibrium price?
Solution Show
[break]
#23 Given the demand equation $P=-1/3Q_{D}+25 and the supply equation $P=2/3Q_{S}+4, find the equilibrium price and quantity without graphing.
Solution Show
[break]
#24 Using the info above, if the government instituted a market price of $10, do we have a shortage or surplus? Of how much? Is this a price ceiling or price floor?
Solution Show
[break]
#25 Graph $P=-1/3Q_{D}+25 and $P=2/3Q_{S}+4 and the price ceiling of $10. Does the information from the graph match the answers you got earlier?
Solution Show
[break]
#26 Lobster is an example of what kind of goods?
Solution Show
[break]
#27 What effects do a change in the prices of other goods have on supply of a good?
Solution Show
[break]
#28 Identify the four complex demand and supply cases and their resulting effects on the market price and quantity.
Solution Show
[break]
[break]
True/False[break]
#1 Supply curves have a positive slope.
Solution Show
[break]
#2 Demand and supply curves can never be straight, otherwise we wouldn’t call them curves.
Solution Show
[break]
#3 One explanation for why demand slopes downward is because of a concept called diminishing marginal cost.
Solution Show
[break]
#4 Economists conventionally label the X-axis price and the Y-axis quantity when graphing demand and supply.
Solution Show
[break]
#5 Demand for normal goods varies directly with income.
Solution Show
[break]
#6 We can determine the market price and quantity is for a good or service just by looking at the supply curve.
Solution Show
[break]
#7 All else equal, an improvement in production technology causes the equilibrium price to fall.
Solution Show

So it’s pretty easy to figure out what happens to the equilibrium point if we change demand or supply while one factor constant, but what happens if we change both at the same time? This is when things get a bit trickier and graphical analysis doesn’t tell us everything that we need to know.

There are four possible complex cases, where both demand and supply change at the same time:

Demand increases and supply increases
Demand increases and supply decreases
Demand decreases and supply increases
Demand decreases and supply decreases

Let me show you why they’re complex. Let’s take a look at the first case graphically.

All you know is that demand increases and supply increases, but you don’t know by how much. Let’s say that demand increases by a lot, but supply only increases by a little.
Increase in Demand, Increase in Supply 1
The end result is that the equilibrium price and quantity increases.
[break]
Hold on though. What if demand increases by a little and supply increases by a lot?
Increase in Demand, Increase in Supply 2
This time, the equilibrium price decreases while the equilibrium quantity increases.
[break]
What if demand and supply both increase by a similar amount?
Increase in Demand, Increase in Supply 3
Again, we have a different end result. This time, the equilibrium price stays constant while the equilibrium quantity goes up.
[break]
In each of these cases, we increased both demand and supply, but we ended up with three different outcomes.

The more factors that we change at once, the more difficult it becomes to analyze the situation. That’s why we have simplifying assumptions like ceteris paribus to make our lives easier.

Back to the case at hand. If demand and supply increases, it’s hard to tell what happens to the equilibrium price, so the effect is unknown or indeterminate. The equilibrium quantity on the other hand increased in all three cases. In fact, the equilibrium quantity will always go up for every case where demand and supply both increase.
[break]
There’s an easier way to see this without going through a bunch of graphs. Let’s go back to my last post where I talked about changing demand or supply while keeping the other constant.

If demand increases while supply stays constant, the equilibrium price will go up and the equilibrium quantity will go up. If supply increases while the demand stays constant, then the equilibrium price will go down while the equilibrium quantity goes up.

Note that increasing demand and increasing supply while the other is constant has opposing effects on price. That’s why when we combine the two together, we can’t tell what happens to the equilibrium price. However, we can tell what happens to the equilibrium quantity because they both move in the same direction.

You can use this technique to find out the end result of the other complex cases as well, instead of having to draw out three separate graphs every time.
Complex Cases Chart
[break]
Recap (tl;dr)

Demand increases; supply increases: equilibrium price – indeterminate, equilibrium quantity – increases
Demand increases; supply decreases: equilibrium price – increases, equilibrium quantity – indeterminate
Demand decreases; supply increases: equilibrium price – decreases, equilibrium quantity – indeterminate
Demand decreases; supply decreases: equilibrium price – indeterminate, equilibrium quantity – decreases
[break]
Reference
McConnell, Campbell R., Stanley L. Brue, and Sean Masaki. Flynn. Macroeconomics: Principles, Problems, and Policies. Boston: McGraw-Hill Irwin, 2009. Print.
[break]
Next economics post: Market Equilibrium: Price Ceilings and Price Floors
Previous economics post: Market Equilibrium: Shifting Demand and Supply