1.2: Demand and Supply, Equilibrium, Price Mechanism, CS and PS

Question 1

Demand

Answer 1

Refers to the quantity of good/service that a consumer is willing and able to purchase at each price.

Question 2

Law of Demand

Answer 2

As price increases, quantity demanded decreases. Vice versa, as Price decreases, QD increases. Have an inverse relationship

Question 3

Expansion

Answer 3

Increase in QD, QS

Question 4

Contraction

Answer 4

Decrease in QD, QS

Question 5

Change in Demand

Answer 5

Shift of demand curve either inwards or outwards caused by the determinants of demand. Not price related

Question 6

Subsitutes

Answer 6

Goods that can be used in place of one another or have “competing demand”

Question 7

Complements

Answer 7

Goods that have to be consumed together or are in “joint demand”

Question 8

Supply

Answer 8

Refers to the quantity of good and services a firm is willing and able to supply at each price for a given period of time.

Question 9

Law of Supply

Answer 9

When price increases, so does quantity supplied as firms are able to earn more revenue for each product sold. However as price falls, quantity supplied goes down as there is less revenue for each product sold. Have a direct relationship

Question 10

Total Revenue

Answer 10

Price times Quantity

Question 11

Determinants of Supply

Answer 11

Shifts in supply curve inwards or outwards caused by the determinants of supply. Not price related

Question 12

Movement along the curve

Answer 12

Changes in QD or QS that are solely due to price changes. (Not Determinants)

Question 13

Equilibrium Price and Quantity

Answer 13

Is the market clearing price where the QD equals to the QS. (Intersection between demand and supply curve).

Question 14

Surplus

Answer 14

Is when quantity supplied is higher than quantity demanded. Surplus of good and services

Question 15

Shortage

Answer 15

Is when quantity demanded is higher than quantity supplied. Shortage of goods and services

Question 16

Price Mechanism

Answer 16

Refers to the interactions of market demand and supply in order to allocate scarce resources.

Question 17

Rationing

Answer 17

The fall in the supply of a goods/service would lead to a price increase. This is due to the existence of excess demand or shortage of goods and services. Eventually it will be rationed to individuals who are willing and able to pay for higher prices.

Question 18

Signalling

Answer 18

An increase in the price of a good or service tells the firm it should increase the production of that good to earn more revenue each product. Resources are mobilised into its production away from goods that are less profitable.

Question 19

Transmission/Incentive

Answer 19

Increase in the price of a good/service indicates that consumers are favouring it. Price falls indicate that the product has fallen out of popularity with the consumers.

Question 20

Consumer Surplus

Answer 20

Difference between the highest price a consumer is willing and able to pay compared to the actual price paid.
Extra: Above equilibrium price and narrows as more units are being consumed

Question 21

Producer Surplus

Answer 21

The difference between the market price and the lowest price that a firm is willing and able to supply at