Economics-Fall 2016 Name: ______

Supply Demand & Investment Study Guide

The study guide is due the day of your unit exam. DUE: Friday March 4th

1)  The law of demand states that:

  1. As PRICE rises quantity demanded for a good will ______.
  1. The relationship between price and quantity demanded is an ______relationship

2)  State the 2 reasons the demand curve is downward sloping:

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3)  The word utility in economics means ______.

4)  Explain what the law of diminishing marginal utility demonstrates:

  1. Hint: think of eating several slices of Pizza---which has the most value?

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5)  How do companies use the law of diminishing marginal utility in terms of pricing their products for consumers?

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6)  The law of supply states that:

  1. As the PRICE rises the quantity supplied of a good will ______.
  1. The relationship between price and quantity demanded is a ______relationship

7)  Draw a properly labeled supply/demand graph for Avocados with a market equilibrium = Price: $2.00 Qty 1,500

·  Label each axis of the graph, both curves D1 & S1, and equilibrium (E1)

8)  Explain how in a free market economy the current equilibrium price of $2.00 is established?

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II. Government price controls are used to alter the free market equilibrium

9)  Draw the market for Apples in equilibrium at price = $100 and quantity = 10,000.

  1. Modify the graph for when the government sets a price ceiling at 0.50 cents.

·  Hint: draw the price ceiling on your graph and label the affect this has on the current market equilibrium

Are more or less Apples SOLD after the price ceiling than before? ______(label the new qty on graph as QD)

This price ceiling caused an increase in the ______demanded and a decrease in the ______supplied. (Qs)

The ceiling produced a ______of supply. (be sure to label this shortage or surplus in your graph)

Which consumers benefit from the ceiling: ______Which consumers lose from the ceiling: ______

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10)  Explain the effect of a government price floor at $35 for the market below..

·  Draw in the price floor and label the graph for any changes

11)  What is the difference between a decrease in quantity demanded and a decrease in demand.

a.  Please understand this—it will be extremely helpful when taking the test!

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12)  Give an example of two products which are complements. ______

13)  Give an example of two products which are substitutes? ______

14)  Sample question: If the price of good A increases and demand for good B decreases, then good A & B are:

  1. Inelastic goods b. elastic goods c. substitutes d. complements

III Shifting Supply & Demand

15)  List the 5 determinants of demand? (hint: the acronym is TIPSE)

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16)  Whenever a determinant of demand (TIPSE) changes you know the demand curve must shift right or shift left

  1. A right shift is an ______in demand while a left shift is a ______in demand

17)  Shift the demand curve for the following changes listed below and label the new equilibrium: D2 E2 Q2)

  1. Think TIPSE! (determinants of demand)

Income increases Price of casual shirts fall (substitute) Price of Blue Jeans fall (a complement)

18)  Whenever demand shifts to the right (holding other factors constant) Price will ______and Quantity Sold ______

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19)  List the 3 determinants of supply? (TIN: is the acronym )

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20)  Whenever a determinant of supply (TIN) changes you know the SUPPLY curve must shift right or shift left

  1. A right shift is an ______in supply while a left shift is a ______in supply

21)  What is the difference between a increase in supply and an increase in quantity supplied?

a.  Please understand this—it will help a lot on the test…..

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22)  Shift the supply curve for the following changes and label new equilibrium S2 E2 Q2

  1. Think TIN! (determinants of supply)

Price of Cotton falls (input) Production Technology increases New firms enter market

23)  Whenever supply shifts to the right (holding other factors constant) Price will ______and Quantity Sold ______

24)  If BOTH curves shift in a graph the change in one variable is ______& the other variable will be ______.

(variables are the new price & new quantity)

IV ELASTIC & INELASTIC SECTION

25)  Draw a demand curve for an elastic good and an inelastic good below.

a.  Now draw a point P1 & Q1 on each graph and then a second higher price at P2 and Q2

Elastic Demand Curve Inelastic Demand Curve

26)  List 3 factors which would cause a good to have very elastic demand: (hint: flat demand curve)

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27)  Notice that the quantity demanded on the inelastic goods changed by significantly LESS than on the elastic graph. Explain why this occurred => that is why price rose and quantity demanded fell less on the inelastic good.

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28)  If price rises by 20% on an ELASTIC GOOD you know that quantity demanded must fall by ______than 20%.

29)  If price rises by 20% on an INELASTIC GOOD you know that quantity demanded must fall by ______than 20%.

30)  The formula for total revenue = ______The formula for profit = ______

31)  What happens to total revenue when prices rise on inelastic goods? Explain why

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V. INVESTMENT SECTION

32)  Explain what a stock and a bond are?

Bond : ______

Stock: ______

33)  Why do companies issue (sell) stock: ______

34)  List the 4 main asset classes investors can choose between from least risky to most risky?

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35)  What is market capitalization of a company? ______

36)  If 2 companies both earn $1 billion per year, will they have the same value? (market capitalization) explain…..

a.  Hint think of Company A & Company B we analyzed in class…..

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37)  What does a P.E. ratio tell you about a company?

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