On a demand and supply graph, price is measured on the vertical axis and quantity on the horizontal axis.
Correct Answer
True
True. Economists place price on the vertical axis and quantity on the horizontal axis, even though price is usually thought of as the variable that drives quantity. This convention is used for both demand and supply curves.
Category: Demand and Supply Basics
Question 2
The law of supply states that as the price of a good rises, the quantity supplied falls, other things being equal.
Correct Answer
False
False. The law of supply states that a higher price leads to a larger quantity supplied, other things being equal, because selling becomes more profitable. That is why a supply curve slopes upward.
Category: Demand and Supply Basics
Question 3
Demand refers to the whole relationship between price and quantity demanded, while quantity demanded refers to a single point on that relationship.
Correct Answer
True
True. Demand is the entire schedule or curve showing how much buyers would purchase at each price, while quantity demanded is the amount at one specific price. Keeping the two terms apart is what separates a shift from a movement along the curve.
Category: Demand and Supply Basics
Question 4
A decrease in the price of a good shifts that good's demand curve to the right.
Correct Answer
False
False. A change in a good's own price causes a movement along its demand curve, raising quantity demanded, not a shift of the curve. Only non-price factors such as income, tastes, population, related prices and expectations shift demand.
Category: Demand and Supply Basics
Question 5
A change in the price of the inputs used to make a good shifts the supply curve of that good.
Correct Answer
True
True. Input prices, such as wages and raw material costs, determine the cost of production, so a change in them changes how much firms offer at every price. Higher input prices shift supply left and lower input prices shift it right.
Category: Supply Shifters
Question 6
A government subsidy paid to producers shifts the supply curve to the left.
Correct Answer
False
False. A subsidy lowers producers' costs, so they offer more at every price and the supply curve shifts to the right. Taxes and costly regulations are the policies that shift supply to the left.
Category: Supply Shifters
Question 7
A price floor affects the market outcome only when it is set above the equilibrium price.
Correct Answer
True
True. A floor is a legal minimum, so if it is below equilibrium the market price is already higher and the floor has no effect. Only a floor above equilibrium binds, and it creates a surplus.
Category: Price Controls
Question 8
A price ceiling is a legal minimum price that sellers are allowed to charge for a good.
Correct Answer
False
False. A price ceiling is a legal maximum price, usually meant to keep a good affordable for buyers. A legal minimum price is a price floor.
Category: Price Controls
Question 9
Rent control is an example of a price ceiling.
Correct Answer
True
True. Rent control sets a legal maximum on the rent landlords may charge, which is a price ceiling. When it is set below equilibrium, the model predicts a shortage of rental housing.
Category: Price Controls
Question 10
A shift in the demand curve for a good automatically causes a shift in the supply curve for that good.
Correct Answer
False
False. The demand curve and the supply curve depend on different factors, so a shift in one does not shift the other. When demand shifts, the market moves along the unchanged supply curve to a new equilibrium, changing quantity supplied rather than supply.
Category: Combined Shifts
Question 11
A decrease in demand with no change in supply lowers both the equilibrium price and the equilibrium quantity.
Correct Answer
True
True. A leftward shift of demand along an unchanged upward-sloping supply curve leads to a new equilibrium with a lower price and a lower quantity. The decline in demand for printed newspapers as readers moved online is a case of this pattern.
Category: Combined Shifts
Question 12
Consumer surplus is the area above the market price and below the supply curve.
Correct Answer
False
False. Consumer surplus is the area above the market price and below the demand curve, because the demand curve shows what buyers are willing to pay. The area below the price and above the supply curve is producer surplus.
Category: Surplus and Efficiency
Question 13
Social surplus is the sum of consumer surplus and producer surplus.
Correct Answer
True
True. Social surplus, also called total or economic surplus, adds the gains to buyers and the gains to sellers. In a competitive market it is largest at the equilibrium price and quantity.
Category: Surplus and Efficiency
Question 14
A binding price ceiling raises social surplus above its level at the market equilibrium.
Correct Answer
False
False. A binding ceiling reduces the quantity traded below the equilibrium quantity, so some mutually beneficial trades do not happen and social surplus falls. The lost surplus is the deadweight loss of the ceiling.
Category: Surplus and Efficiency
Question 15
A binding price ceiling transfers part of producer surplus to consumers.
Correct Answer
True
True. Buyers who still obtain the good pay a lower price, so some of the surplus sellers would have earned goes to those buyers instead. At the same time, the smaller quantity traded creates a deadweight loss.
Category: Surplus and Efficiency
Question 16
At a price above the equilibrium price, quantity demanded exceeds quantity supplied.
Correct Answer
False
False. Above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus that pushes the price down. Quantity demanded exceeds quantity supplied only at prices below equilibrium, which is a shortage.
Category: Equilibrium
Question 17
A demand curve slopes downward because of the law of demand.
Correct Answer
True
True. The law of demand says that a higher price leads to a lower quantity demanded, other things being equal. Plotting that inverse relationship with price on the vertical axis gives a downward-sloping curve.
Category: Demand and Supply Basics
Question 18
Economic efficiency means that producers earn the largest possible profit.
Correct Answer
False
False. Economic efficiency means all possible gains from trade have been achieved, so no one can be made better off without making someone else worse off. It concerns the total gains to buyers and sellers, not the profit of one side.
Category: Surplus and Efficiency
Question 19
A change in tastes in favor of a product shifts the demand curve for that product to the right.
Correct Answer
True
True. Tastes and preferences are one of the factors that shift demand. When a product becomes more popular, buyers want more of it at every price, so the demand curve shifts to the right.
Category: Demand Shifters
Question 20
Under a binding price floor, the quantity actually bought and sold rises above the equilibrium quantity.
Correct Answer
False
False. A binding floor raises the price, so buyers purchase less and the quantity actually traded falls to the quantity demanded at the floor, below the equilibrium quantity. Sellers would like to sell more, but the extra units remain an unsold surplus.
Category: Price Controls