1.4: Supply & Demand

Question 1

What is demand

Answer 1

The amount of consumers who desire to purchase at various prices effective demand is where the consumer is both willing and able to pay

Question 2

What are factors that influence demand

Answer 2

Changing population size, Changing consumer incomes, Changing taste, Changing price, Changing legislation and Changes in price of subs and complementary goods

Question 3

What does the demand curve look like

Answer 3

Typically drawn sloping downwards (Price = Vertical, Demand = Horizontal) and price is the only factor that an cause movement along the demand curve

Question 4

What is The Law of Demand

Answer 4

As price falls/rises, quantity increases/decreases (As price falls from P1 to P2 then demand rises form Q1 to Q2)

Question 5

What causes shifts in demand

Answer 5

Any factor other than price that influences demand will cause the entire curve to shift, shift left = decrease in demand whereas shift right = demand increase even if price remains constant

Question 6

What is Supply

Answer 6

Amount of a good or service a producer is willing to put on the market, higher the price the higher supply level due to there being the ability to make more money

Question 7

What is the supply curve

Answer 7

Business aims to maximize profits by considering production costs and expected profit. As prices rise, firms increase supply to capitalize on potential profit, attracting additional supply and attracting new firms to the market.

Question 8

What is the shape of the supply curve

Answer 8

Upward sloping indicates a positive relationship between supply and price. Firms increase prices to attract supply, maximizing profits. However, this increases costs, requiring suppliers to charge higher prices for resources.

Question 9

What does the supply curve look like

Answer 9

Drawn sloping upwards, price is the only factor that can create movement

Question 10

What causes shifts in supply curve

Answer 10

Anything other than price, changes in production, technology, weather and legislation

Question 11

How does a competitive market function

Answer 11

The demand curve slopes downwards, indicating that more will be purchased as price falls.
The supply curve slopes upwards, indicating that more sellers enter the market as prices rise.

Question 12

What is market equilibrium

Answer 12

The price at which demand is equal to supply and there is no tendency for change.

Question 13

What is elasticity

Answer 13

A measure of how sensitive (response) the demand for a good or service is to a change in its price (greater demand = more elastic)

Question 14

What is the formula for elasticity

Answer 14

% Change in Quantity Demand
% Change in PRICE
If answer is between 0 and -1: the relationship is inelastic, If the answer is between -1 and infinity: the relationship is elastic

Question 15

What is elastic demand

Answer 15

If the demand for a good or service changes by a greater % than the % change in its price, it is elastic.

Question 16

What does the elastic demand diagram look like

Answer 16

Even just a small increase in price will result in a dramatic decrease in the quantity demand of the good in a near perfectly competitive market.

Question 17

What is inelastic demand

Answer 17

If the demand for a good or a service changes by a smaller % than the% change in its price then its inelastic

Question 18

What does the inelastic demand diagram look like

Answer 18

Even a significant increase in price will result in a very small decrease in quantity demanded

Question 19

If demand is price elastic then it would …

Answer 19

Increasing price = reduction in total revenue and vice versa

Question 20

If demand is price inelastic then it would …

Answer 20

Increasing price = increase total revenue
and vice versa

Question 21

How does elasticity work in the real world

Answer 21

Firms want to make the price elasticity of demand for their goods less elastic

Question 22

State 2 ways you can reduce price elasticity

Answer 22

Strengthen Brand Power and Promote USP’s

Question 23

State a benefit of Price Inelasticity

Answer 23

Firms are able to raise prices increasing revenue because demand will only fall by a small amount

Question 24

What is income elasticity of demand

Answer 24

A measure of how responsive demand is to a change in the income levels of consumers

Question 25

What is the difference between a normal good and a luxury good

Answer 25

If income rises we buy more of this, most items fall under this, whereas we buy disproportionately more luxury goods if income rises

Question 26

How does supply and demand work with necessary goods

Answer 26

They have a Yed between 0 and +1. Demand rises with income but less than proportionately

Question 27

How does supply and demand work with luxury goods

Answer 27

They have a Yed >+1. Demand rises more than proportionate to a change in income

Question 28

What are inferior goods

Answer 28

Some goods will see a fall in demand when consumer incomes rise so they have a negative Yed

Question 29

What is the formula for income elasticity

Answer 29

% change in Quantity demanded of good X
% change in income
+ answer = Normal Good
- answer = Inferior Good

Question 30

What are the determinants of elasticity

Answer 30

Time period and Number and Closeness of Substitutes