Module M04 Quiz: Supply and Market Equilibrium
30 questions Β· Introductory Β· Mix of multiple choice, calculation, and short answer
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Attempt each question before clicking Show Answer. For calculation questions, write out your working first.
Question 1
Lesson L01 Β· Supply Demand
The law of supply states that as price rises:
Type: Multiple Choice
- A) Quantity supplied falls
- B) Quantity supplied rises β higher price makes production more profitable attracting more supply
- C) Supply curve shifts right
- D) Demand increases
Show Answer
Answer: B) Quantity supplied rises β higher price makes production more profitable attracting more supply
Higher prices increase the profitability of producing a good, inducing firms to supply more β the fundamental law of supply.
Question 2
Lesson L01 Β· Supply Demand
A firm's supply curve is based on its:
Type: Multiple Choice
- A) Average fixed cost curve
- B) Marginal cost curve above average variable cost
- C) Average revenue curve
- D) Total cost curve
Show Answer
Answer: B) Marginal cost curve above average variable cost
A firm supplies where P β₯ AVC and produces at MC = P β so its short-run supply curve is its MC curve above AVC.
Question 3
Lesson L01 Β· Supply Demand
A wheat farmer can supply 1,000 tonnes at $250/tonne or 1,400 tonnes at $300/tonne. Calculate the price elasticity of supply between these two points.
Type: Calculation
Show Answer
Answer: 0.8
PES = (%ΞQs/%ΞP) = ((1400-1000)/1000)/((300-250)/250) = (40%)/(20%) = 2.0. (Check: 400/1000=40%; 50/250=20%; PES=2.0 β elastic supply)
Question 4
Lesson L01 Β· Supply Demand
What is the difference between a change in quantity supplied and a change in supply?
Type: Short Answer
Show Answer
Answer: A change in quantity supplied is a movement along the supply curve caused by a price change. A change in supply is a shift of the entire supply curve caused by a non-price determinant (input costs, technology, expectations, etc.).
Only price changes cause movements along the curve; everything else shifts the curve.
Question 5
Lesson L01 Β· Supply Demand
Which is an example of a movement along the supply curve (not a shift)?
Type: Multiple Choice
- A) A drought reduces wheat supply
- B) Iron ore price rises and miners supply more
- C) A new technology reduces steel production costs
- D) Government imposes a new mining royalty
Show Answer
Answer: B) Iron ore price rises and miners supply more
A price change causes a movement along the curve. The other options are non-price changes that shift the supply curve.
Question 6
Lesson L02 Β· Supply Demand
Which factor would shift the supply curve of coffee to the LEFT (decrease supply)?
Type: Multiple Choice
- A) Improved harvesting technology
- B) A fall in coffee bean prices
- C) A drought destroying coffee crops in Brazil and Vietnam
- D) Entry of new coffee producers
Show Answer
Answer: C) A drought destroying coffee crops in Brazil and Vietnam
A drought destroys supply capacity β this shifts supply left (decreases supply at every price).
Question 7
Lesson L02 Β· Supply Demand
If the price of natural gas (an input for manufacturing) rises, what happens to supply of manufactured goods?
Type: Multiple Choice
- A) Supply increases (shifts right)
- B) Supply decreases (shifts left) β higher input costs raise MC and reduce profitability
- C) Supply is unchanged
- D) Demand also falls
Show Answer
Answer: B) Supply decreases (shifts left) β higher input costs raise MC and reduce profitability
Higher input prices raise the cost of production at every output level, shifting supply left.
Question 8
Lesson L02 Β· Supply Demand
Australia's iron ore supply rises from 800m to 950m tonnes/year after new mines open. At constant price $120/tonne, estimate the revenue change for Australia.
Type: Calculation
Show Answer
Answer: $18bn increase
ΞRevenue = ΞQ Γ P = 150m Γ $120 = $18bn
Question 9
Lesson L02 Β· Supply Demand
Explain how expectations about future prices can shift current supply.
Type: Short Answer
Show Answer
Answer: If producers expect prices to rise in the future they may withhold supply now to sell later at higher prices, reducing current supply. Conversely, expected price falls may prompt increased current supply.
Forward-looking behaviour by producers shifts current supply based on expected future conditions.
Question 10
Lesson L02 Β· Supply Demand
Which change would shift supply of Australian beef to the RIGHT?
Type: Multiple Choice
- A) A drought reducing pasture quality
- B) Increased cost of stock feed
- C) New feed lot technology reducing per-head costs
- D) Higher export tariffs imposed by China
Show Answer
Answer: C) New feed lot technology reducing per-head costs
Lower production costs from new technology reduce MC at every output level, shifting supply right (increasing supply).
Question 11
Lesson L03 Β· Supply Demand
At market equilibrium:
Type: Multiple Choice
- A) All consumers get the good they want
- B) Quantity demanded equals quantity supplied and the market clears
- C) Prices are always low
- D) Supply exceeds demand
Show Answer
Answer: B) Quantity demanded equals quantity supplied and the market clears
Equilibrium: Qd = Qs. The market clears β no shortage or surplus at the equilibrium price.
Question 12
Lesson L03 Β· Supply Demand
Demand: P=100-2Q. Supply: P=10+3Q. Find equilibrium price and quantity.
Type: Calculation
Show Answer
Answer: Q*=18, P*=$64
100-2Q=10+3Q β 90=5Q β Q=18; P=100-36=$64
Question 13
Lesson L03 Β· Supply Demand
Why do prices tend to fall when there is a surplus in a market?
Type: Short Answer
Show Answer
Answer: When quantity supplied exceeds quantity demanded, producers have unsold inventory. To clear stock, they cut prices. As price falls, quantity demanded rises and quantity supplied falls until the market clears at equilibrium.
Excess supply creates downward pressure on price β sellers compete to attract buyers.
Question 14
Lesson L03 Β· Supply Demand
Sydney's rental market has demand Qd=500-2P and supply Qs=100+P (P in $/week, Q in apartments). Calculate equilibrium rent and quantity.
Type: Calculation
Show Answer
Answer: P*=$133/week, Q*=233
500-2P=100+P β 400=3P β P=$133.33; Q=100+133=233
Question 15
Lesson L03 Β· Supply Demand
A market is in equilibrium at P=$50. If the government announces a price freeze at $50 and supply then increases, what happens?
Type: Multiple Choice
- A) Nothing changes
- B) A surplus develops β at $50 the increased supply exceeds demand but the price freeze prevents adjustment
- C) A shortage develops
- D) The equilibrium price falls to $50
Show Answer
Answer: B) A surplus develops β at $50 the increased supply exceeds demand but the price freeze prevents adjustment
If supply increases but price is frozen, quantity supplied rises while quantity demanded stays the same β surplus.
Question 16
Lesson L04 Β· Supply Demand
If both supply and demand increase simultaneously, we can be certain that:
Type: Multiple Choice
- A) Price rises
- B) Quantity rises
- C) Both price and quantity rise
- D) Price falls
Show Answer
Answer: B) Quantity rises
Increased demand raises Q; increased supply also raises Q. Net effect on price is ambiguous (depends on relative magnitudes). Quantity unambiguously rises.
Question 17
Lesson L04 Β· Supply Demand
COVID-19 simultaneously reduced restaurant supply (closures) and restaurant demand (fear). What can we predict about restaurant prices and quantity?
Type: Multiple Choice
- A) Price rises, quantity rises
- B) Quantity falls (both shifts reduce Q), price change is ambiguous
- C) Price falls, quantity falls
- D) Price rises, quantity is ambiguous
Show Answer
Answer: B) Quantity falls (both shifts reduce Q), price change is ambiguous
Both supply decrease (closures) and demand decrease (fear) reduce equilibrium quantity. Price effects offset β supply decrease raises price, demand decrease lowers price; net effect ambiguous.
Question 18
Lesson L04 Β· Supply Demand
Iron ore demand: P=200-Q. Iron ore supply: P=50+0.5Q. A new mine shifts supply to P=30+0.5Q. Calculate the change in equilibrium price and quantity.
Type: Calculation
Show Answer
Answer: P falls $13.33; Q rises 26.67
Original: 200-Q=50+0.5Q β Q*=100, P*=\(100. New: 200-Q=30+0.5Q β Q*=113.3, P*=\)86.67. ΞP=-$13.33, ΞQ=+13.3
Question 19
Lesson L04 Β· Supply Demand
What is comparative statics analysis?
Type: Short Answer
Show Answer
Answer: Comparative statics compares two equilibrium positions β before and after a change in an exogenous variable (like income, input costs, or technology). It predicts the direction of change in equilibrium price and quantity without analysing the adjustment path.
We compare static equilibria rather than tracing the dynamic adjustment process.
Question 20
Lesson L04 Β· Supply Demand
Income rises and the good is a normal good. Predict the effect on equilibrium price and quantity.
Type: Multiple Choice
- A) Price falls, quantity rises
- B) Price rises, quantity rises
- C) Price rises, quantity falls
- D) Both fall
Show Answer
Answer: B) Price rises, quantity rises
Higher income increases demand for a normal good β demand shifts right β both P and Q rise at the new equilibrium.
Question 21
Lesson L05 Β· Supply Demand
A shortage means:
Type: Multiple Choice
- A) Price is above equilibrium
- B) Price is below equilibrium β quantity demanded exceeds quantity supplied
- C) There is unsold inventory
- D) Producers are losing money
Show Answer
Answer: B) Price is below equilibrium β quantity demanded exceeds quantity supplied
A shortage (excess demand) occurs when price is set below equilibrium β buyers want more than producers are willing to supply at that price.
Question 22
Lesson L05 Β· Supply Demand
Sydney has a housing shortage. Quantity demanded is 400,000 dwellings and quantity supplied is 340,000 at current rents. The shortage is:
Type: Calculation
Show Answer
Answer: 60,000 dwellings
Shortage = Qd - Qs = 400,000 - 340,000 = 60,000 dwellings.
Question 23
Lesson L05 Β· Supply Demand
When a surplus exists in a market, what adjustment mechanism restores equilibrium?
Type: Short Answer
Show Answer
Answer: With a surplus sellers cannot sell all their output at the current price. They compete for buyers by cutting prices. As price falls demand rises and supply falls until Qd=Qs is restored.
Price competition among sellers drives prices down to clear the surplus.
Question 24
Lesson L05 Β· Supply Demand
A price ceiling below equilibrium creates a shortage. Which statement about the long-run shortage is correct?
Type: Multiple Choice
- A) The shortage shrinks over time as demand falls
- B) The shortage grows over time as supply becomes more elastic and decreases more
- C) The shortage stays constant
- D) Shortages only occur in the short run
Show Answer
Answer: B) The shortage grows over time as supply becomes more elastic and decreases more
Over time supply becomes more elastic (producers exit, reduce investment) while demand becomes more elastic too β the shortage typically worsens in the long run.
Question 25
Lesson L06 Β· Supply Demand
Prices coordinate economic activity by:
Type: Multiple Choice
- A) Allowing government to allocate resources centrally
- B) Conveying information about scarcity and profitability to decentralised decision-makers
- C) Ensuring equal distribution of goods
- D) Eliminating all shortages instantly
Show Answer
Answer: B) Conveying information about scarcity and profitability to decentralised decision-makers
Prices aggregate and transmit information: high prices signal scarcity and attract resources; low prices signal abundance and redirect them β Hayek's knowledge problem.
Question 26
Lesson L06 Β· Supply Demand
Hayek argued that the price system solves which fundamental economic problem?
Type: Multiple Choice
- A) The problem of government budget deficits
- B) The knowledge problem β prices aggregate dispersed local information that no central planner could collect
- C) The problem of income inequality
- D) The problem of monopoly
Show Answer
Answer: B) The knowledge problem β prices aggregate dispersed local information that no central planner could collect
Prices aggregate millions of individual bits of knowledge about scarcity and value β far more than any central authority could collect or process.
Question 27
Lesson L06 Β· Supply Demand
A sudden drought destroys 30% of Australian wheat. Without government intervention, what happens to wheat prices and how does this allocate resources?
Type: Multiple Choice
- A) Price stays flat; government rations wheat
- B) Price rises; higher prices signal scarcity attracting new supply and reducing demand β the price system allocates the reduced supply without central direction
- C) Price falls; producers exit
- D) Price is controlled by the government
Show Answer
Answer: B) Price rises; higher prices signal scarcity attracting new supply and reducing demand β the price system allocates the reduced supply without central direction
The price rise signals scarcity to all market participants simultaneously β producers expand supply (if possible) and consumers economise, without any central coordination.
Question 28
Lesson L06 Β· Supply Demand
Iron ore price doubles from $60 to $120/tonne. Estimate how many new Australian mine projects become viable if each requires a minimum price of $80/tonne to break even.
Type: Calculation
Show Answer
Answer: Projects requiring \(80-\)120/tonne become viable
At \(60, projects needing >\)60 are unviable. At $120, projects needing up to $120 become profitable. The price rise activates marginal supply β the exact number depends on the distribution of project break-even costs.
Question 29
Lesson L06 Β· Supply Demand
Explain why market economies generally outperform command economies in resource allocation.
Type: Short Answer
Show Answer
Answer: Market prices aggregate decentralised information about consumer preferences and production costs that no central planner can access. Price signals automatically direct resources to highest-value uses through profit and loss incentives β without requiring a central authority to coordinate millions of decisions.
The invisible hand uses prices to coordinate decentralised decisions more efficiently than central planning.
Question 30
Lesson L06 Β· Supply Demand
'Dollar votes' refers to:
Type: Multiple Choice
- A) Voting in elections with your income level
- B) Consumers signalling preferences to producers by spending β firms follow consumer spending patterns to decide what to produce
- C) A political donation system
- D) Government allocating dollars based on votes
Show Answer
Answer: B) Consumers signalling preferences to producers by spending β firms follow consumer spending patterns to decide what to produce
In a market economy, consumer spending patterns guide production decisions β firms produce what consumers are willing to pay for.