2. Demand, Supply and Market Equilibrium

Question 1

Law of Demand relationship

Answer 1

inverse/negative relationship between price of product and quantity demanded

Question 2

Substitution effect

Answer 2

Law of demand

When a product becomes more expensive, consumers substitute toward a cheaper good

Question 3

Income effect

Answer 3

Law of demand
When a product becomes more expensive, it takes up a larger portion of a consumers income and so the consumer has less to spend on other goods
(the purchasing power of income is reduce)

Question 4

Demand: Importance of Price

Answer 4

Price changes to goods and services changes the quantity demanded

Question 5

Movement along the demand curve

Answer 5

Due to price

1. Expansion: decrease in price, increase in demand
2. Contraction: increase in price, decrease in demand

Question 6

Non-Price Factors lead to:

Answer 6

Shift in demand: QD of good changes at every price

Price stays same, the quantity varies

Question 7

Shift in demand occurs as:

Answer 7

1. Increase (every price point, consumers willing for more)

2. Decrease (every price point, willing for less)

Question 8

Non-Price Factors:

Answer 8

1. Price of related goods
2. Tastes and preferences
3. Level of disposable income
4. Demographic factors
5. Expectations of consumers

Question 9

What effect do price of related goods have? (Demand)

Answer 9

1. Substitutes: >price, price,

Question 10

What influences tastes and preferences?

Answer 10

1. Consumer trends

2. Media influence

Question 11

What effect does level of disposable income have?

Answer 11

1. Normal Goods: >income, >demand

2. Inferior Goods: >income,

Question 12

What effect do demographic factors have?

Answer 12

Influences consumption patterns

Question 13

What are examples of demographic factors?

Answer 13

1. Age
2. Gender
3. Socioeconomic status

Question 14

What is the effect of expectations of consumers?

Answer 14

If consumers expect lower prices in the future, they decrease demand

Question 15

What is the effect of tastes and preferences?

Answer 15

If consumers prefer something, they are likely to have a greater demand for that specific commodity

Question 16

Law of Supply Relationship

Answer 16

positive relationship: If the price of g/s increases, then the quantity supplied increases

Question 17

Why is the law of supply’s relationship as it is?

Answer 17

Rational, self-interested producers sell output at a higher price due to the profit motive

Question 18

Supply: Importance of Price

Answer 18

Price changes to good or services, changes the quantity supplied

Question 19

Movement along the supply curve

Answer 19

Due to price

1. Expansion: increase in price, increase in supply
2. Contraction: decrease in price, decrease in supply

Question 20

Non-Price Factors lead to:

Answer 20

Shift in supply: QS changes at every price point

Question 21

Shift in supply occurs as:

Answer 21

1. Increase (every price point, supply more)

2. Decrease (every price point, supply less)

Question 22

Non-Price Factors

Answer 22

1. Expectations of Producers
2. Technology
3. Prices of Other Goods
4. Input prices (Production costs)
5. Government regulation

Question 23

What is the effect of the expectations of producers?

Answer 23

Producers expect certain future prices and take advantage by storing supply to release later if a higher price is anticipated

Question 24

What is the effect of technology?

Answer 24

Improvement in technology leads to a reduction in production costs so suppliers can produce more at a lower cost

Question 25

What is the effect of the prices of other goods? (Supply)

Answer 25

If the prices of other goods increases, then the quantity supplied increases

Question 26

What is the effect of input prices (production costs)?

Answer 26

If the input prices decreases, then supply increases and if ip increases then supply decreases

Question 27

What is the effect of government regulations?

Answer 27

1. Influence the number of suppliers in the market, which increases or decreases market supply
2. Government regulations can take the form of taxes, tariffs, subsidies and quotas

Question 28

What does price mechanism do?

Answer 28

1. In a mixed/market economy: goods and services are allocated using price mechanism
2. Helps clear shortages and surpluses within the market

Question 29

What does the invisible hand of price mechanism do?

Answer 29

By people pursuing their self-interests, scarce resources are allocated efficiently

Question 30

What is the market equilibrium point?

Answer 30

QD = QS

Question 31

What is a shortage?

Answer 31

1. QD > QS

2. Consumers bid for limited goods , increase in price

Question 32

What is the effect of a shortage on demand and supply curve?

Answer 32

1. Consumers rational response is to bid for limited goods: Demand curve contraction
2. Producers increase production: Supply curve expansion

Question 33

What is a surplus?

Answer 33

1. QS > QD

2. Firms lower, prices to clear excess stock

Question 34

What is the effect of a surplus on demand and supply curve?

Answer 34

1. Firms rational response to surplus is to lower prices and clear excess stock: Supply curve contraction
2. Consumers increase quantity demanded due to lower prices: Demand curve expansion