1.3 Demand and supply in Product markets

Question 1

how are prices determined in competitive markets?

Answer 1

by market forces of supply and demand

Question 2

what does a supply and demand curve diagram examine?

Answer 2

the relationship between prices and quantities

Question 3

definition of demand

Answer 3

the quantity of a good or service that consumers are willing and able to purchase at any given price

Question 4

what is the law of demand?

Answer 4

• there is an inverse relationship between price and quantity
• as price falls, quantity demanded increases (vice versa)

Question 5

word for making an assumption

Answer 5

ceteris paribus

Question 6

the demand curve is

Answer 6

downwards sloping

Question 7

income effect definition

Answer 7

as price falls people’s income goes further and their purchasing power increases

Question 8

substitution effect definition

Answer 8

as the price of a good decreases, ceteris paribus, it becomes cheaper relative to its substitutes

Question 9

diminishing marginal utility definition (on an individual scale)

Answer 9

consumers gain less (diminishing) utility from each additional (marginal) unit that is consumer

Question 10

what is the monetary value of utility?

Answer 10

the maximum price willing to be paid

Question 11

reasons for the demand curve being downwards sloping

Answer 11

1. income effect
2. the substitution effect
3. diminishing marginal utility

Question 12

difference between a movement along and a shift in the demand curve

Answer 12

movement along: caused by a change in price
shift: caused by a non-price determinant

Question 13

the similarity between a movement along and a shift in the demand curve

Answer 13

both result in a change in demand

Question 14

other causes of movements along the demand curve (other than price change)

Answer 14

• changes in supply
• government intervention (i.e. price floors and ceilings)

Question 15

extension in demand definition

Answer 15

a fall in price leading to a movement outwards in quantity terms of demand

Question 16

contraction in demand definition

Answer 16

an increase in price leading to a movement inward in quantity terms of demand

Question 17

increase in demand definition

Answer 17

a shift outwards of the demand curve that represents an increase in the quantity demanded AT ANY GIVEN PRICE

Question 18

decrease in demand definition

Answer 18

a shift inwards of the demand curve that represents a decrease in the quantity demanded AT ANY GIVEN PRICE

Question 19

non-price determinants of demand

Answer 19

• change in the price of a substitute good
• change in the price of a complementary good
• derived demand
• changes in tastes & advertising
• changes in incomes (for normal & inferior goods)
• changes in population/demographics
• changes in legislation

Question 20

what is derived demand

Answer 20

demand that derives from the demand for another good and which usually applies to markets of factors of production (e.g. demand for phones goes up –> the demand for silicone goes up)

Question 21

examples of legislation that affects demand

Answer 21

• ban on smoking in public places
• mask regulations

Question 22

supply definition

Answer 22

the quantity of a good or service that producers are willing and able to sell at any given price

Question 23

law of supply

Answer 23

• direct relationship between price and quantity supplied
• as price increases, the quantity supplied increases

Question 24

the supply curve is…

Answer 24

upwards sloping

Question 25

profit incentive definition

Answer 25

• assuming production costs are constant
  -> profits will increase as price increases
  –> creating an opportunity cost of staying out of the market and an incentive for more firms to join and stay in the market

Question 26

covering costs of production

Answer 26

• costs of production differ for each firm
  -> at low prices, only firms with low costs of production can profit
  –> as price increases, firms with higher costs of production are also able to profit from producing
  —> creates incentives for firms to produce more and enter the market

Question 27

why are supply curves upwards sloping

Answer 27

1. profit incentive
2. covering costs of production
3. increasing marginal costs

Question 28

contraction in supply definition

Answer 28

a fall in price leading to a movement inward in quantity terms of supply

Question 29

extension in supply definition

Answer 29

a rise in price leading to a movement outwards in quantity terms of supply

Question 30

increase in supply definition

Answer 30

a shift outwards of the supply curve that represents an increase in the quantity demanded AT ANY GIVEN PRICE

Question 31

decrease in supply definition

Answer 31

a shift inwards of the supply curve that represents a decrease in the quantity demanded AT ANY GIVEN PRICE

Question 32

non-price determinants of supply

Answer 32

• government intervention
• the discovery of new sources of resources
• number of firms
• competitive supply
• shock/unpredictable events
• improvements in technology
• joint supply
• costs of production
• price expectations

Question 33

what is competitive supply?

Answer 33

when goods use the same resources so that the production of one good reduces the amount of resources available for another (e.g. wheat in bread and noodles)

Question 34

examples of government intervention as a non-price determinant of supply

Answer 34

• taxes (specific and ad valorem)
• subsidies