Demand and supply flashcards

Demand and supply form the foundation of microeconomic analysis. Demand refers to the quantity of a good consumers are willing and able to purchase at various prices, while supply refers to the quantity producers are willing and able to offer for sale at various prices. Both are represented as schedules or curves on a diagram. Students must distinguish between movements along a curve, caused by a price change, and shifts of the entire curve, caused by non-price factors such as income, tastes, input costs, or technology. When demand and supply interact, they determine the equilibrium price and quantity. Changes in the conditions of demand or supply create new equilibria, and students must be able to predict and illustrate these changes accurately, explaining the adjustment process through excess demand or excess supply.

1. Card 1

   What is the law of demand?

   As price rises, quantity demanded falls, and vice versa, assuming all other factors remain constant — this inverse relationship gives the demand curve its downward slope.

2. Card 2

   What is the difference between a change in demand and a change in quantity demanded?

   A change in quantity demanded is a movement along the curve caused by a price change; a change in demand is a shift of the whole curve caused by a non-price factor.

3. Card 3

   Name four non-price determinants of demand.

   Key shifters include consumer income, tastes and preferences, prices of related goods (substitutes and complements), and consumer expectations about future prices.

4. Card 4

   What is the law of supply?

   As price rises, quantity supplied increases, and vice versa, giving the supply curve its upward slope, as higher prices make production more profitable.

5. Card 5

   Name four non-price determinants of supply.

   Key shifters include costs of production, technology, prices of related goods in production, government taxes or subsidies, and the number of sellers in the market.

6. Card 6

   What is market equilibrium?

   Market equilibrium is the point where quantity demanded equals quantity supplied, producing a stable equilibrium price and equilibrium quantity with no tendency for change.

7. Card 7

   What happens in a market when price is above equilibrium?

   An excess supply (surplus) exists; unsold stock accumulates, putting downward pressure on price until the market returns to equilibrium.

8. Card 8

   What happens in a market when price is below equilibrium?

   An excess demand (shortage) exists; consumers compete for limited goods, putting upward pressure on price until equilibrium is restored.

9. Card 9

   How does a rise in consumer income affect the demand for a normal good?

   For a normal good, rising income increases demand, shifting the demand curve to the right and raising both equilibrium price and quantity.

10. Card 10

    What is the difference between substitute goods and complementary goods?

    Substitute goods are alternatives (e.g. tea and coffee); complementary goods are used together (e.g. cars and petrol). A price rise in one affects demand for the other in opposite directions.

11. Card 11

    If production costs fall, what happens to the supply curve and equilibrium?

    Lower costs of production shift supply to the right; equilibrium price falls and equilibrium quantity rises, benefiting consumers.

12. Card 12

    What occurs when both demand increases and supply decreases simultaneously?

    Both shifts push equilibrium price upward; the effect on equilibrium quantity is indeterminate and depends on the relative size of each shift.

• Students often confuse a shift in the demand curve with a movement along it, incorrectly stating that a price change 'increases demand' rather than 'increases quantity demanded'.
• When two curves shift simultaneously, many students incorrectly state a definite outcome for both price and quantity without acknowledging that one of the two is indeterminate without knowing the relative magnitudes.
• A common error is drawing the supply curve shifting in the wrong direction in response to a tax, forgetting that a tax raises production costs and therefore shifts supply to the left, not the right.

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