REVIEW

PART 1: MICROECONOMICS
CHAPTER 2: DEMAND AND SUPPLY
THEORY
1. Market: 1. Market is:
A market is where buyers and sellers come together to carry out A. where people sell and buy resources and products
an economic transaction. B. where people communicate to convey information about
price, quantity and quality
C. where buyers and sellers of goods, services or resources are
linked together to carry out an exchange
D. All of the above
2. Demand 2. Demand is:
Demand is the quantity of a good or service that consumers are A. the various quantities of a good (or service) the consumer
willing and able to purchase at a given price in a given time are willing to buy
period. Consumers must have the financial means to buy the B. different possible prices at which consumers are able to
product, the ability to buy. This is known as effective demand. purchase
C. Both A and B
D. Either A or B
3. The law of demand 3. The Law of Demand states that:
As the price of a product falls, the quantity demanded of the A. as the price of a good falls, the quantity of the good
product will usually increase, ceteris paribus. demanded also falls, ceteris paribus
(Ceteris paribus is an assumption that means “all other things being equal”) B. there is a negative causal relationship between the price of
a good and its quantity demanded over a particular time
period
C. when the price falls, the good becomes less affordable, and
consumers are likely to want and be able to buy less of it.
D. the demand for the good varies inversely with income
4. The non-price determinants of demand 4. An increase in income leads to a leftward shift in the demand
(1) Income: For normal goods, as income rises, the demand for curve of this good. What is the good?
the product will also rise. If a product is considered to be A. Normal goods
inferior goods, then demand for the product will fall as B. Inferior goods
income rises and the consumer starts to buy higher priced C. Luxury goods
substitutes in place of the inferior goods. D. None of the above
5. If tastes change against the product (it becomes less popular),
(2) Price of substitutes: Two goods are substitutes (substitute demand……… and the demand curve shifts to the ……….
goods) if they satisfy a similar need. Two goods are A. increases - right
complements (complementary goods) if they tend to be used B. increases – left
together. C. decreases – right
D. decreases – left
(3) Taste/ preferences: A change in tastes in favour of a product 6. Orange juice and lemon juice are said to satisfy similar needs.
will lead to more being demanded at every price. If the price of orange juice increases, demand for lemon juice
will:
(4) Demographic factors: If the population begins to grow, then A. increase
the demand for most products will increase and that their B. decrease
demand curves will start to shift to the right. If the age C. stay unchanged
structure of the economy starts to alter, then this will affect D. impossible to determine
the demand for certain products. 7. If the percentage of older people in an economy starts to
increase, then there may be an increase in:
(5) Changes in income distribution: If there is a change in the A. the demand for walking frames
distribution of income, such that the relatively poor are better B. the demand for rock concerts
off and the rich slightly worse off, then there may be an C. the demand for extreme sports
increase in the demand for basic necessity goods D. the demand for online games
8. If the poor are better off and the rich slightly worse off, then
(6) Government policy changes there may be an increase in:
A. the demand for inferior goods
(7) Seasonal changes B. the demand for luxury goods
C. the demand for basic necessity goods
D. the demand for high-priced goods
9. Which policy changes affect demand?
A. Changes in direct taxes
B. Compulsory seat belts
C. A ban on smoking in public places
D. All of the above
5. Supply 10. The supply of an individual firm indicates the various
Supply is the willingness and ability of producers to produce a quantities of a good (or service) a firm is ………………
quantity of a good or service at a given price in a given time produce and supply to the market for sale at different possible
period. Producers must have the financial means to supply the prices, during a particular time period, ceteris paribus.
product, the ability to supply. This is known as effective supply. A. willing and able
B. willing
C. able
D. not willing
6. The law of supply 11. The Law of Supply states that:
As the price of a product rises, the quantity supplied of the A. as price increases, quantity supplied also increases, ceteris
product will usually increase, ceteris paribus paribus

Why the supply curve slopes upward?: At higher prices there
will be more potential profits to be made and so the producer
will increase output. Indeed, other producers may also be
attracted to enter the market.
12. Why the supply curve slopes upward?
7. The non-price determinants of supply
(1) The cost of factors of production: If there is an increase in
the cost of a factor of production, then this will increase the
firm’s costs, meaning that they can supply less.
(2) Prices of relative goods: Competitive supply: The goods
compete for the use of the same resources, and producing
more of one means producing less of the other. Joint supply:
Production of goods that are derived from a single product,
so that it is not possible to produce more of one without
producing more of the other.
(3) The state of technology: Improvements in the state of
technology should lead to an increase in supply.
(4) Expectation: Producers who expect the demand for their
product to rise in the future may assume that the higher
demand will lead to a higher price. If it is possible to store
the product they might then withhold the product from the
market in order to be ready to be able to supply more in the
future, to gain from the higher price.
(5) Government intervention
B. there is a negative causal relationship between the quantity
of a good supplied over a particular time period and its
price, ceteris paribus
C. the two variables, price and quantity supplied, change in
the opposite direction
D. the lower the price, the greater the quantity supplied.
A. At higher prices there will be less potential profits to be
made and so the producer will increase output
B. Higher prices generally mean that the firm’s profits
increase, and so the firm faces an incentive to produce
more output
C. Lower prices mean lower profitability, and the incentive
facing the firm is to produce more
D. No reason
13. If a factor price rises, production costs ……., production
becomes ……profitable and the firm produces ……..; the
supply curve shifts to the ……...
A. increases – more – more – right
B. decreases – less – more – right
C. increases – less – less – left
D. decreases – more – less – left
14. A farmer, who can grow wheat or corn. If the price of wheat
increases, the farmer may:
A. reduce the production of corn
B. reduce the cost of production of corn
C. increase the production of corn
D. increase the cost of production of corn
15. Petrol and diesel are both produced from crude oil. An increase
in the price of petrol leads to:
A. an increase in quantity supplied of petrol
B. an increase in quantity supplied of diesel
C. Both A and B
D. Either A or B
16. If firms expect the price of their product to rise, they:
A. increase their supply in the present
B. withhold some of their current supply from the market
C. store the product in order to be ready to be able to supply
less in the future
D. do nothing
 17. Which type of Government intervention has the effect of
shifting the supply curve upwards?
A. Direct tax
B. Indirect tax
C. Subsidy
D. Minimum price

Answers:

1.D 2.C 3.B 4.B 5.D 6.A 7.A 8.C 9.D 10.A 11.A 12.B 13.C 14.A 15.C 16.B 17.B

CHAPTER 2: DEMAND AND SUPPLY

DIAGRAM
• The demand curve normally slopes downwards.

• The supply curve normally slopes upwards.

LINEAR DEMAND AND SUPPLY CURVE

THE DISTINCTION BETWEEN A MOVEMENT ALONG THE CURVE
AND A SHIFT OF THE CURVE
Multiple choice questions:
1. In the figure above, which
increase in demand?
A. from point a to point e
B. from point a to point c
C. from point a to point b
D. from point a to point d
2. In the figure above, which
decrease in demand?
A. from point a to point d
B. from point a to point e
C. from point a to point c
D. from point a to point b
3. In the figure above, which
decrease in quantity demanded
demand?
A. from point a to point c
B. from point a to point e
C. from point a to point d
D. from point a to point b
4. In the figure above, which movement reflects how
consumers would react to an increase in the price of a
non-fruit snack?
A. from point a to point b
B. from point a to point d
C. from point a to point c
D. from point a to point e
5. In the figure above, which movement reflects an
increase in the price of a substitute for fruit snacks?
A. from point a to point d
B. from point a to point e
C. from point a to point b
D. from point a to point c
movement reflects an
6. In the figure above, which movement reflects an
increase in the price of a complement for fruit snacks?
A. from point a to point b
B. from point a to point d
C. from point a to point e
D. from point a to point c
movement reflects a
7. In the figure above, which movement reflects how
consumers would react to an increase in the price of a
fruit snack that is expected to occur in the future?
A. from point a to point b
B. from point a to point e
C. from point a to point c
movement reflects a
D. from point a to point d
but NOT a decrease in
8. In the figure above, which movement reflects an
increase in income if fruit snacks are an inferior good?
 A. from point a to point d B. point a to point e.
B. from point a to point c C. point a to point b.
C. from point a to point b D. point a to point c.
D. from point a to point e 12. In the figure above, an increase in the quantity of oil
9. In the figure above, which movement reflects an supplied but NOT in the supply of oil is shown by a
increase in income if fruit snacks are a normal good? movement from
A. from point a to point d A. point a to point c.
B. from point a to point e B. point a to point b.
C. from point a to point b C. point a to point e.
D. from point a to point c D. point a to point d.
10. In the figure above, which movement reflects a 13. In the figure above, a decrease in the quantity of oil
decrease in population? supplied but NOT in the supply of oil is shown by a
A. from point a to point d movement from
B. from point a to point c A. point a to point e.
C. from point a to point e B. point a to point d.
D. from point a to point b C. point a to point b.
D. point a to point c.
14. In the figure above, which movement could be caused
by an increase in the wages of oil workers?
A. point a to point d
B. point a to point b
C. point a to point c
D. point a to point e
15. In the figure above, which movement could be caused
by the development of a new, more efficient refining
technology?
A. point a to point e
B. point a to point c
C. point a to point b
D. point a to point d

Answers:
11. In the figure above, an increase in the supply of oil
1.D 2.C 3.B 4.C 5.A 6.D 7.C 8.B 9.A
would result in a movement from
A. point a to point d. 10.B 11.C 12.C 13.D 14.A 15.C
CHAPTER 2: DEMAND AND SUPPLY
CALCULATION
- Consumers are now willing and able to buy more PCs at each and every price. So,
whereas previously they had only been prepared to buy 3,000 units per week at
$1,600 each, now they are prepared to buy 4,000.
- Consumers previously were prepared to pay $1,600 for 3,000 PCs; now they are
prepared to pay $1,800 each for that quantity.

- Companies are now more willing and/or more able to supply PCs at each and every
price. Previously they had only been prepared to supply 3,000 units per week at
$1,200; now they are prepared to supply 4,000.
- Companies previously wanted $1,200 per unit to persuade them to supply 3,000
units per week; now they are prepared to accept $1,000.
 Multiple choice questions:
The demand and supply curves for hotdogs in Sacramento are given by the following two equations:

Qd = 8,000 - 800P Qs = 2,000 + 200P

1. If students suddenly acquire a greater taste for hotdogs, which of the following would be the new demand curve?
A. Qd = 6,500 - 800P
B. Qd = 9,500 - 800P
C. Both A and B
D. Neither A nor B
2. If instead one of the stores selling hotdogs goes out of business, which of the following might be the new supply curve?
A. Qs = 1,200 + 200P
B. Qs = 2,800 + 200P
C. Both A and B
D. Neither A nor B

Answers:

1.B 2.A