Lesson 3 – part 2: Stock market quiz on Basic principles of supply and demand in stock trading

b) The demand decreases

When the price of a stock increases, the demand for that stock tends to decrease. This is because higher prices make the stock less attractive to potential buyers, particularly if they believe that the stock is overvalued or unlikely to continue increasing in value. Additionally, higher prices may make it more difficult for investors to afford shares of the stock, which can decrease demand. This dynamic can lead to a decrease in the overall demand for the stock until supply and demand come back into balance.

a) The supply increases

When there is high demand and low supply of a particular stock, the supply of that stock tends to increase. This is because as demand increases and buyers are willing to pay higher prices for the stock, it becomes more profitable for sellers to sell their shares, which can increase the overall supply. Additionally, if sellers believe that the stock is likely to continue increasing in value, they may hold off on selling, which can decrease supply. However, if demand remains high and buyers continue to pay high prices, sellers may eventually increase the supply of the stock.

a) A government-imposed limit on the price that a stock can be sold for

A price ceiling in stock trading is a government-imposed limit on the price at which a particular stock can be sold. This means that sellers are not allowed to charge a higher price than the specified ceiling, even if buyers are willing to pay more. Price ceilings are typically used to prevent excessive price increases that may occur during times of high demand, such as during a crisis or in response to a sudden increase in demand. However, price ceilings can also have unintended consequences, such as reducing the overall supply of a stock or creating market distortions.

b) The price decreases

When there is high supply and low demand for a particular stock, the price of that stock tends to decrease. This is because sellers will need to lower their prices to make their shares more attractive to potential buyers. As the price of the stock decreases, it may become more affordable for buyers to purchase, which can increase demand and eventually help bring supply and demand back into balance. However, if demand remains low and sellers continue to flood the market with shares, the price of the stock may continue to decline.

c) A minimum price that a stock must be sold for

A price floor in stock trading is a minimum price that a particular stock must be sold for. This means that sellers are not allowed to charge a lower price than the specified floor, even if buyers are willing to pay less. Price floors are typically used to protect sellers or producers by ensuring that they are able to earn a certain minimum price for their goods or services. However, price floors can also have unintended consequences, such as creating surpluses or reducing demand for the stock.

a) The quantity of shares traded increases

When there is high demand and low supply for a particular stock, the quantity of shares traded tends to increase. This is because buyers may be willing to pay more for the stock, and sellers may want to take advantage of the higher prices by selling more shares. As a result, the overall volume of shares traded can increase, which can also contribute to price increases. However, if demand remains high and supply remains low for an extended period of time, it may be difficult for buyers to find enough shares to purchase, which can limit trading volumes.

a) When there is more demand than supply for a stock

A shortage in stock trading occurs when there is more demand than supply for a particular stock. This means that there are not enough shares available to meet the demand from buyers. Shortages can occur for a variety of reasons, such as high demand for a popular stock or limited supply due to production constraints. When there is a shortage, the price of the stock may increase as buyers compete for the limited available shares. Shortages can also create opportunities for investors to profit by buying and reselling shares at higher prices.

a) The price increases

When there is a decrease in supply and no change in demand for a stock, the price of the stock tends to increase. This is because there are fewer shares available, which can drive up the price as buyers compete for the limited supply. If demand remains constant, sellers may be able to charge higher prices for their shares, leading to an overall increase in the price of the stock. However, if demand also decreases along with supply, the price may not necessarily increase, and may even decrease.

a) Elastic demand refers to when the demand for a stock changes significantly in response to a change in price, while inelastic demand refers to when the demand for a stock changes only slightly in response to a change in price.

Elastic demand in stock trading refers to a situation where the demand for a stock changes significantly in response to a change in price. This means that if the price of a stock increases or decreases, the quantity of shares demanded will also increase or decrease correspondingly.

On the other hand, inelastic demand in stock trading refers to a scenario where the demand for a stock changes only slightly in response to a change in price. This means that even if the price of a stock increases or decreases, the quantity of shares demanded will not change significantly.

c) A change in investor sentiment can affect both the supply and demand of a stock.

A shift in investor sentiment, which can be caused by a variety of factors such as news events or market conditions, can influence the perceived value of a stock. If investors become more optimistic about a stock, they may be willing to buy more of it, which can increase demand and drive up the stock price. Conversely, if investors become more pessimistic about a stock, they may be more inclined to sell, which can increase the supply of the stock and drive down the price.