2. the market p12-17

Question 1

format of a supply and demand diagram graph

Answer 1

• price on y axis
• quantity on x axis
• demand curves down from left to right
• supply curves up from left to right

Question 2

on the supply and demand diagram graph, what does the DEMAND curve mean

Answer 2

• as the price of the product increases, the demand decreases
• bc at a higher price less buyers will be able to buy the product so demand is lower

Question 3

on the supply and demand diagram graph, what does the SUPPLY curve mean

Answer 3

• ## the higher the price charged, the higher the quantity supplied

Question 4

What is the equilibrium price (market clearing price)

Answer 4

• when the quantity that buyers demand is the same as the quantity the sellers wish to supply
• where the two lines meet on the graph (a point in the middle)

Question 5

when does a surplus occur

Answer 5

• price increases
• when the quantity demanded is less than supplied - excess supply = SURPLUS

Question 6

what would happen on the supply and demand graph if the PRICE of a product INCREASED

Answer 6

• MOVEMENT right on the supply curve
• MOVEMENT left for demand curve
• therefore quantity demanded is less than supplied so there is excess supply - SURPLUS

Question 7

what would happen on the supply and demand graph if the PRICE of a product DECREASED

Answer 7

• MOVEMENT left on the supply curve
• MOVEMENT right on the demand curve
• more demand than supply
• therefore excess damand - creates. SHORTAGE in the market

Question 8

when does a shortage occur

Answer 8

• price decreases
• when there is more demand than supply

Question 9

8 factors that influence a change in demand

Answer 9

1. substitutes - (cost of margarine increased, demand for butter would rise)
2. complementary products - demand for printers falls, ink falls too
3. consumer income - fall in income, higher demand for cheap goods
4. consumer tastes - diets, fall in demand for sweets
5. advertising and branding
6. demographics - better healthcare, higher demand for old ppl stuff
7. seasonal changes
8. external shock - flooding - increase in sandbags etc

Question 10

6 factors that influence a change in supply

Answer 10

1. costs of production - less profit so less supply
2. Indirect taxes - taxes on goods or services. if tax increases supply decreases
3. Subsidies - if businesses are given subsidies then supply increases
4. new technology - more efficient and cost-effective - increase supply
5. weather conditions - sun for farming - increase supply etc
6. external shock - war, disrupt businesses - may have to make weapons instead etc

Question 11

rise in demand…

Answer 11

demand curve shifts right

Question 12

fall in demand…

Answer 12

demand curve shifts left

Question 13

rise in supply…

Answer 13

supply curve shifts right

Question 14

fall in supply…

Answer 14

supply curve shifts left

Question 15

formula for price elasticity of demand (PED)

Answer 15

% change in quantity demanded / % change in price

Question 16

what is the meaning of price elasticity of demand

Answer 16

• how much the price change affects the demand
• always negative

Question 17

the product is price elastic if….

Answer 17

the PED is GREATER than 1 (ignoring the minus)

Question 18

the product is price inelastic if….

Answer 18

the PED is less than 1

Question 19

price elastic products

Answer 19

for price elastic products the % change of demand is GREATER than the % change in price

Question 20

price inelastic products

Answer 20

for price inelastic products the % change in demand is LESS than the % change in price

Question 21

price elastic meaning

Answer 21

• demand changes a lot with small changes in price
• if the price goes up, people buy much less; if the price goes down, people buy much more.
• non - essential items

Question 22

price inelastic meaning

Answer 22

• demand doesn’t change much even if the price does
• If the price goes up or down, people still buy roughly the same amount.
• essential goods (like fuel or medicine) that people need regardless of price changes.

Question 23

what does a demand curve look like for price elasticity and inelasticity

Answer 23

elastic - shallow curve = demand is dependent on price
inelastic - steep = demand is not dependent on price and small change in price wont rly effect demand

Question 24

if you increase/decrease the price of a price ELASTIC product, what happens to the sales revenue?

Answer 24

• price increase will make sales revenue go down.
• the money lost from % decrease in sales is more than money gained from % increase in price
• small price decrease will largely increase demand so increase sales revenue

Question 25

if you increase/decrease the price of a price INELASTIC product, what happens to the sales revenue?

Answer 25

• increasing price will increase sales revenue
• bc the money lost from the % decrease in sales, will be less than the money gained from the % increase in price.
• decreasing price will decrease sales revenue bc the sales increase slightly but the price decreases effects it way more.

Question 26

formula and name for income elasticity of demand

Answer 26

YED
% change in the quantity demanded / % change in income

Question 27

how can someones income change

Answer 27

• changing jobs
• promotion
• pay rise
• dismissed
• average income increases during economic growth
• average income decreases during economic decline (recession)

Question 28

if the YED is between 0-1….

Answer 28

• necessity products (fruit and vegetables)
• positive YED
• means that if income rises demand rises
• demand rises at a SLOWER RATE than income

Question 29

if the YED is 1+ (higher than 1)

Answer 29

• luxury product (designer clothes/ fine wine)
• positive YED
• demand rises FASTER than the rise in income

Question 30

if the YED is less than 0 (negative)

Answer 30

• inferior product (Aldi’s own brand baked beans)
• demand falls when income increases
• demand rises when income falls