Markets, Supply, and Demand — High School Economics practice questions

A monopoly exists when:

1. A market has many sellers of similar products
2. A single firm is the sole producer of a good with no close substitutes
3. Two firms dominate a market
4. The government regulates prices

Answer: B — A single firm is the sole producer of a good with no close substitutes

A monopoly is a single seller with significant pricing power, often due to high barriers to entry (patents, control of resources, scale economies).

GDP (Gross Domestic Product) measures:

1. The total value of all financial assets in a country
2. The total value of final goods and services produced within a country in a given time period
3. The number of unemployed people
4. Average household income

Answer: B — The total value of final goods and services produced within a country in a given time period

GDP measures the total market value of final goods and services produced within a country's borders during a specific period (typically a year).

A price ceiling set below market equilibrium typically results in:

1. A surplus
2. A shortage, since quantity demanded exceeds quantity supplied at the lower price
3. Equilibrium
4. Higher market prices

Answer: B — A shortage, since quantity demanded exceeds quantity supplied at the lower price

Price ceilings below equilibrium (e.g., rent control) create shortages, since the lower price increases demand but reduces supply.

The law of demand says that — all else equal — when price rises:

1. Quantity demanded rises
2. Quantity demanded falls
3. Quantity supplied falls
4. The demand curve shifts right

Answer: B — Quantity demanded falls

B) Downward-sloping demand curve. A) Reverses the relationship. C) That's the law of supply (reversed). D) A shift, not a movement along the curve.

A city imposes a $500/month price ceiling on rent in a market where equilibrium rent is $1,200. The most likely result is:

1. A surplus of apartments
2. A shortage — quantity demanded exceeds quantity supplied at the legal max
3. Equilibrium is unchanged
4. Landlords raise their prices above $1,200

Answer: B — A shortage — quantity demanded exceeds quantity supplied at the legal max

B) A binding price ceiling below equilibrium reduces quantity supplied and raises quantity demanded, causing a shortage. Non-price rationing (waitlists, connections) follows. A) That would happen with a binding price FLOOR. C) A binding ceiling always distorts. D) Illegal above the ceiling.

In a competitive market, if the market price is set BELOW the equilibrium price:

1. A surplus develops, and price falls further
2. Nothing happens because the price is fixed by law
3. A shortage develops — quantity demanded exceeds quantity supplied — and market forces push price up toward equilibrium
4. Both consumer and producer surplus rise

Answer: C — A shortage develops — quantity demanded exceeds quantity supplied — and market forces push price up toward equilibrium

C) Below-equilibrium prices create excess demand; sellers can raise prices, buyers bid them up, until equilibrium is reached. A) Reverses — surplus is above equilibrium. B) Only if there's a binding legal ceiling; the question describes a free market. D) Total surplus falls when price is not at equilibrium.

Consumers expect the price of laptops to fall sharply next month. The most likely effect on the CURRENT laptop market is:

1. Current equilibrium is unchanged
2. Current supply shifts right
3. Current demand shifts right
4. Current demand shifts LEFT — buyers postpone purchases

Answer: D — Current demand shifts LEFT — buyers postpone purchases

D) Expectations of future price DECREASES cause buyers to wait, reducing today's demand. B) Supply not directly affected by consumer expectations. C) Reverses the direction — trap. A) Expectations do influence current markets.

Coffee and tea are substitutes. If the price of tea rises sharply, the most likely short-run effect in the coffee market is:

1. Coffee supply shifts left
2. Coffee supply shifts right
3. Movement down along the coffee demand curve
4. Coffee demand shifts right, raising coffee's equilibrium price and quantity

Answer: D — Coffee demand shifts right, raising coffee's equilibrium price and quantity

D) When the price of a substitute rises, demand for the other good increases — shift right, raising price and quantity. A/B) Tea price doesn't directly affect coffee supply. C) Shifts, not movements.

In a market for used cars, incomes fall during a recession. If used cars are an INFERIOR good, the most likely effect is:

1. Demand for used cars shifts left
2. Supply of used cars shifts right
3. Demand for used cars shifts RIGHT — as incomes fall, buyers substitute toward the cheaper option, raising demand at every price
4. No effect

Answer: C — Demand for used cars shifts RIGHT — as incomes fall, buyers substitute toward the cheaper option, raising demand at every price

C) Inferior goods have NEGATIVE income elasticity — demand rises when income falls. A) That's the response for a NORMAL good (classic trap). B) Supply is unrelated to buyer income directly. D) The market IS affected.

A favorable weather season causes a bumper wheat crop. The most likely effect in the wheat market is:

1. No change because supply curves are vertical
2. Demand shifts right; price and quantity both rise
3. Movement up along the supply curve
4. Supply shifts right; equilibrium price falls and quantity rises

Answer: D — Supply shifts right; equilibrium price falls and quantity rises

D) A favorable supply shock shifts supply right, lowering price and raising quantity sold. B) Demand isn't affected by weather on the producer side. C) Movements along supply come from price changes, not weather. A) Supply curves slope upward.

What is market equilibrium?

The price/quantity at which quantity demanded equals quantity supplied — where the demand and supply curves intersect.

What is a shortage?

When quantity demanded exceeds quantity supplied — typically at a price below equilibrium. Pushes price up.

What is the difference between a change in quantity demanded and a change in demand?

Change in quantity demanded: movement along the curve due to price change. Change in demand: shift of the entire curve due to other factors.

What factors affect price elasticity of demand?

Availability of substitutes, necessity vs. luxury, share of income, time to adjust, definition of the market.