Practice Questions Supply & Demand

Supply and demand determine equilibrium price and quantity produced. Which of the following best explains this concept?

• The government sets the equilibrium price and quantity.

• Equilibrium is reached when supply equals demand.

• Producers decide the equilibrium price and quantity.

• Consumers have no effect on equilibrium.

Answer explanation

Equilibrium is reached when supply equals demand, meaning the quantity of goods consumers want to buy matches the quantity producers want to sell, establishing a stable market price.

What does the Law of Demand state?

• Higher the price, the more willing to buy.

• Lower the price, the more willing to buy.

• Price does not affect willingness to buy.

Answer explanation

The Law of Demand states that as prices decrease, consumers are more willing to buy a product. Therefore, the correct choice is 'Lower the price, the more willing to buy.'

Diminishing Marginal Utility refers to the concept that as a person consumes more of a product, the satisfaction gained from consuming each additional unit decreases.

• The satisfaction increases with each additional unit consumed.

• The satisfaction remains constant with each additional unit consumed.

• The satisfaction decreases with each additional unit consumed.

• The satisfaction is unrelated to the number of units consumed.

Answer explanation

Diminishing Marginal Utility indicates that as more units of a product are consumed, the additional satisfaction from each unit decreases. Therefore, the correct choice is that satisfaction decreases with each additional unit consumed.

Which of the following are determinants of demand?

• Price of the good

• Consumer income

• Tastes and preferences

• All of the above

Answer explanation

All of the options listed—price of the good, consumer income, and tastes and preferences—are key determinants of demand. Therefore, the correct answer is 'All of the above'.

Based on the graph showing an increase in demand, what happens to the equilibrium price when demand increases from D1 to D2?

• A) It decreases from P2 to P1

• B) It increases from P1 to P2

• C) It remains the same

• D) It fluctuates

Answer explanation

When demand increases from D1 to D2, the quantity demanded at each price level rises, leading to a higher equilibrium price. Thus, the equilibrium price increases from P1 to P2, making B the correct choice.

Based on the graph showing a decrease in demand, what happens to the equilibrium price and quantity when demand decreases from D1 to D2?

• A) Price increases, Quantity increases

• B) Price decreases, Quantity decreases

• C) Price increases, Quantity decreases

• D) Price decreases, Quantity increases

Answer explanation

When demand decreases from D1 to D2, the equilibrium price falls due to lower willingness to pay, and the equilibrium quantity also decreases as suppliers adjust to the reduced demand. Thus, the correct answer is B) Price decreases, Quantity decreases.

The Law of Supply states that:

• As the price of a good increases, the quantity supplied increases.

• As the price of a good decreases, the quantity supplied increases.

• The supply of a good is independent of its price.

• The supply of a good decreases as the demand increases.

Answer explanation

The Law of Supply indicates that as the price of a good increases, producers are willing to supply more of it, leading to an increase in quantity supplied. Thus, the correct choice is: As the price of a good increases, the quantity supplied increases.

Which of the following is a determinant of supply?

• Cost of labor

• Consumer preferences

• Weather conditions

• Brand reputation

Answer explanation

Cost of labor directly affects production costs, influencing how much of a product suppliers are willing to produce. The other options relate more to demand or external factors, not supply.

What does the graph titled 'Showing Increase in Supply' illustrate?

• A) A decrease in demand

• B) An increase in supply

• C) A decrease in supply

• D) An increase in demand

Answer explanation

The graph titled 'Showing Increase in Supply' clearly illustrates an increase in supply, making option B the correct choice. The other options refer to changes in demand or decreases in supply, which are not depicted.

What does the graph illustrate about the supply curve?

• Increase in supply

• Decrease in supply

• No change in supply

Answer explanation

The graph shows a leftward shift in the supply curve, indicating a decrease in supply. This means that at every price level, less quantity is supplied, which aligns with the correct answer choice.