Source: ECO 2013 Midterm 1 Practice Exam (Form A), University of Florida
Tags: supply, demand, equilibrium, shortage, surplus, normal good, inferior good, substitutes, complements, consumer surplus, producer surplus, demand shifters, supply shifters
Difficulty: Introductory Prerequisites: Basic understanding of the PPF and opportunity cost.
Supply and demand is the most-used model in economics. It explains how prices and quantities are determined in a market, and what happens when conditions change. Nearly every policy question in this course (price controls, taxes, trade) starts from a supply-and-demand diagram. If you can shift the right curve in the right direction and trace through the new equilibrium, you can answer the majority of exam questions in this unit.
Prices adjust to balance the quantity buyers want with the quantity sellers offer. When something changes in the market (incomes rise, input costs fall, a complement gets cheaper), either the demand curve or the supply curve shifts, which moves the equilibrium price and quantity. Knowing which curve shifts and which direction is most of the work.
Demand
The relationship between the price of a good and the quantity consumers are willing and able to buy, all else equal. Shown as a downward-sloping curve.
Think of it as the full schedule of "how much people want to buy at every possible price."
Supply
The relationship between the price of a good and the quantity producers are willing and able to sell, all else equal. Shown as an upward-sloping curve.
Think of it as the full schedule of "how much firms want to sell at every possible price."
Quantity demanded vs demand
A change in price causes a movement along the demand curve (change in quantity demanded). A change in anything other than price causes the entire demand curve to shift (change in demand).
This distinction is tested constantly. "Price falls, quantity demanded rises" is a movement. "Incomes rise, demand increases" is a shift.
Quantity supplied vs supply
Same logic: a change in the good's own price is a movement along the supply curve. A change in input costs, technology, or expectations shifts the curve.
Equilibrium
The price and quantity at which the quantity demanded equals the quantity supplied. Graphically, it is the intersection of the two curves.
Shortage
Occurs when the quantity demanded exceeds the quantity supplied at a given price. The price is below equilibrium. The market pushes the price upward.
Surplus
Occurs when the quantity supplied exceeds the quantity demanded at a given price. The price is above equilibrium. The market pushes the price downward.
Normal good
A good for which demand increases when consumer incomes rise.
Most goods fall into this category: when people earn more, they buy more.
Inferior good
A good for which demand decreases when consumer incomes rise.
Think of it as the budget option you switch away from once you can afford something better (e.g. instant noodles when you can now afford restaurant meals).
Substitutes (in consumption)
Two goods where a rise in the price of one leads to an increase in demand for the other. They compete for the same purchase.
Example: ravioli and tortellini. If ravioli gets more expensive, people buy more tortellini.
Complements (in consumption)
Two goods where a rise in the price of one leads to a decrease in demand for the other. They are consumed together.
Example: smartphones and smartphone cases. If smartphones get cheaper, people buy more of both.
Substitutes in production
Two goods that use the same resources, so producing more of one means producing less of the other. If the price of cake rises, bakeries shift toward cake and the supply of bread falls.
Complements in production
Two goods that are produced together as part of the same process. If you produce more of one, you automatically produce more of the other (e.g. wood boards and sawdust).
Consumer surplus
The difference between what a buyer is willing to pay and what they actually pay.
Formula: willingness to pay minus market price.
Producer surplus
The difference between the market price and the minimum price at which a seller is willing to sell.
Remember: a change in the good's own price moves you along the curve. Everything below shifts the curve.
Income: Demand for normal goods increases when income rises. Demand for inferior goods decreases when income rises.
Price of related goods: If a substitute gets more expensive, demand for this good increases. If a complement gets more expensive, demand for this good decreases.
Tastes and preferences: If consumers develop a stronger preference, demand shifts right.
Number of buyers: More buyers in the market shifts demand right.
Expectations of future prices: If buyers expect prices to rise later, demand increases now.
Input prices: If the cost of a key input falls (e.g. cheaper computer chips for truck production), supply increases (shifts right), leading to a surplus at the old price and a lower equilibrium price.
Technology: An improvement in production technology increases supply (shifts right), lowering the equilibrium price and raising the equilibrium quantity.
Price of related goods in production:
Substitutes in production: if the price of cake rises, bakeries shift toward cake and supply of bread decreases.
Complements in production: if the price of sawdust falls, firms cut less timber, so the supply of wood boards also decreases.
Number of sellers: More sellers shifts supply right.
Expectations of future prices: If sellers expect higher prices later, they may hold back supply today (supply shifts left), raising today's price and reducing today's quantity.
When a shifter hits one side of the market:
Demand shifts right (increase): at the old price there is now a shortage, so price rises and quantity rises.
Demand shifts left (decrease): at the old price there is a surplus, so price falls and quantity falls.
Supply shifts right (increase): at the old price there is a surplus, so price falls and quantity rises.
Supply shifts left (decrease): at the old price there is a shortage, so price rises and quantity falls.
When a question says "the entire demand increases by 30 bouquets," add 30 to every quantity demanded in the table, then find the new price at which quantity demanded equals quantity supplied.
Similarly, "supply increases by 150 cups" means add 150 to every quantity supplied, then find the new equilibrium.
Consumer surplus = willingness to pay minus price.
Example: Professor Knight is willing to pay $650 for a ticket, and the price is $300. His consumer surplus is $650 minus $300 = $350.
Saying "demand increased" when you mean "quantity demanded increased." A price drop causes a movement along the demand curve (quantity demanded rises). "Demand" itself only shifts when something other than the good's own price changes. Exams test this wording precisely.
Confusing complements and substitutes. If the price of popcorn falls and Jose buys more soda, the goods are complements (consumed together), not substitutes. Students sometimes default to "substitutes" whenever two goods are mentioned.
Getting the direction wrong on complements in production. Complements in production move together. If the price of sawdust falls, firms produce less sawdust and therefore also less of the co-produced good (wood boards). Supply of both falls.
Forgetting that supply shifters affect the supply curve, not the demand curve. A fall in input costs shifts supply right. It does not shift demand.
⚠️ The shift-then-trace pattern accounts for most of the marks: identify which curve shifts, which direction, then read off the new equilibrium price and quantity.
⚠️ Questions on related goods (substitutes, complements, normal, inferior) always require you to identify the relationship first, then determine the correct curve shift.
⚠️ Schedule-based questions (tables of price, Qd, Qs) are common. When the question says "demand increases by X," add X to every Qd entry and find the new intersection. Same logic for supply shifts.
⚠️ Consumer surplus is always willingness to pay minus price. There is usually one straightforward calculation question.
⚠️ The "quantity demanded vs demand" wording distinction is tested directly. A price change moves along the curve. Everything else shifts it.
True or false: When the price of a good falls, the demand for that good increases. False. The quantity demanded increases (movement along the curve). Demand itself does not shift.
If wireless earbuds are a normal good and incomes rise, demand shifts ____. Right (increases).
True or false: A fall in input costs shifts the demand curve to the right. False. It shifts the supply curve to the right.
Consumer surplus = ____ minus ____. Willingness to pay minus price.
If the price is below equilibrium, there is a ____ (shortage/surplus). Shortage.
Q: Good weather produces a larger than normal crop of peaches. What happens to the equilibrium price and quantity?
A: Supply shifts right. Equilibrium price falls, equilibrium quantity increases.
Q: Jose enjoys soda and popcorn. When the price of popcorn falls, Jose buys more soda. Are popcorn and soda substitutes or complements?
A: Complements. A fall in the price of one good increases consumption of the other.
Q: Wireless earbuds are a normal good and incomes rise. What happens at the initial equilibrium price?
A: Demand shifts right, creating a shortage at the initial price. The price rises to restore equilibrium.
Q: Computer chips are an input for pickup trucks and the price of chips falls. What happens to the pickup truck market?
A: Lower input costs shift truck supply right, creating a surplus at the old price. The equilibrium price falls and quantity increases.
Q: Smartphones and cases are complements. The price of smartphones falls. What happens to the market for cases?
A: Cheaper smartphones increase demand for cases (demand shifts right), creating a shortage at the initial price. The price of cases rises.
Q: There is a technological innovation in electric scooter production. What happens to equilibrium price and quantity?
A: Technology improves supply (shifts right). Price falls, quantity increases.
Q: Ravioli and tortellini are substitutes. The price of ravioli rises. What happens to the tortellini market?
A: Consumers switch to tortellini, so demand for tortellini increases (shifts right). Price of tortellini rises and quantity increases.
Q: Grocery stores expect the price of milk to rise later this week. What happens today?
A: Sellers withhold supply today (supply shifts left). Price rises today and quantity falls today.
Q: The hot chocolate schedule shows Qd = 750 and Qs = 525 at $1.00. What is the result?
A: A shortage of 225 cups (750 minus 525). Price is below equilibrium.
Q: The initial flower market is in equilibrium at $10 (Qd = Qs = 70). Demand increases by 30. What is the new equilibrium quantity?
A: The new demand schedule is: $8/110, $10/100, $12/90, $14/80, $16/70. At $12, new Qd = 90 and Qs = 90. New equilibrium quantity = 90 bouquets.
Q: Hot chocolate supply increases by 150 cups. The original equilibrium was at $2.50 (Qd = Qs = 600). What is the new equilibrium price?
A: New supply schedule: $1.00/675, $1.50/700, $2.00/725, $2.50/750, $3.00/775. At $1.50, Qd = 700 and new Qs = 700. New equilibrium price = $1.50.
Supply and demand is the base for nearly everything else in this course. Price controls (ceilings and floors) are analysed by looking at what happens when the government forces the price away from equilibrium. Taxes shift one of the curves and create a wedge between what buyers pay and sellers receive. International trade questions compare the domestic equilibrium price with the world price to determine whether a country imports or exports.
Supply, demand, equilibrium price, equilibrium quantity, shortage, surplus, demand curve, supply curve, demand shifters, supply shifters, normal good, inferior good, substitutes, complements, substitutes in production, complements in production, consumer surplus, producer surplus, willingness to pay, input costs, technology, expectations, market equilibrium, ECO 2013, macroeconomics midterm 1, UF econ