2 The Market System

Question 1

What is the law of demand?

Answer 1

The law of demand simply proposes that as the price of a good falls, the quantity you would be willing to purchase increases, GIVEN THAT EVERYTHING ELSE REMAINS UNCHANGED

Question 2

What does the demand curve represent?

Answer 2

The quantities of a good or service that consumers are willing and able to buy

Question 3

What are the 3 things that the law of demand imply?

Answer 3

1. Demand curve is downward sloping
2. Demand curve has a negative slope
3. Demand curve shows an inverse relationship between price and quantity demanded

Question 4

What are the two movements of demand?

Answer 4

1. An extension of demand - a movement down the demand line
2. A contraction of demand - a movement up the demand line
   (not shifts in demand - just up or down)

Question 5

What causes a shift in demand?

Answer 5

a) Changing the price of a substitute
b) changing the price of a compliment
c) change in the income of consumers
d) change in tastes and preferences
e) changes in interests rates - if interest rate increases => likely to reduce demand for product and services as => more ppl saving

Question 6

What are inferior goods?

Answer 6

An increase in income => decrease in demand

Question 7

What are normal goods?

Answer 7

Increase income means a consumer will purchase more of a good at a particular price => demand curve shift to the right

Question 8

What is supply?

Answer 8

Quantity of good or service that producer is willing and able to supply onto the market at a given price in a given time period

Question 9

What are the three main reasons for the supply curve sloping upwards from left to right?

Answer 9

1. When the market price rises => more profitable for businesses to increase output
2. Higher prices send signals to firms that they can increase their profits by satisficing demand in the market. Output rises, firms cost rise, higher price to justify the extra output.
3. Higher price => more profitable for other firms to start producing product => new firms entering the market => increase in supply available for consumers to buy

Question 10

What relationship does the supply curve show?

Answer 10

The price of a good or service and the quantity producer is willing and able to sell in the market.

• If the price of the good reduces (ceteris paribus) => movement down the supply curve (contraction
• If price of good increases => extension up on the supply curve (extension)

Question 11

What causes a shift in the supply curve?

Answer 11

a) costs of production e.g. raw materials, lower costs mean business can supply more
b) changes in production technology
c) government taxes and subsidies
d) climatic conditions - have an effect on agricultural products e.g. fruit
e) change in the price of a substitute
f) the number of producers in the market

Question 12

What is equilibrium price?

Answer 12

Price equilibrium is found where supply and demand are equal. Both sellers and buyers are happy with price and quantity.

Question 13

What is the ‘consumer surplus’?

Answer 13

Where some consumers get a product at a lower price than they were prepared to pay

Question 14

What is a the ‘producer surplus’?

Answer 14

This is where producers are prepared to sell out less than the equilibrium price

Question 15

When do you have ‘excess supply’?

Answer 15

Look at graph on page 23 - price needs to fall to meet the equilibrium price

Question 16

When do you have ‘excess demand’?

Answer 16

• Look at graph on page 24 - the price needs to increase in order to reach the equilibrium.
• Excess demand producers raise prices leading to a contraction of demand up the demand curve and an extension of supply up the supply curve until the equilibrium is reached.