2.1 + 2.2 + 2.3 - Supply and Demand and Markets

Question 1

What is “effective demand”?

Answer 1

Effective demand is the quantity of a product that consumers want and are able to buy at a given price, at a particular time.

Question 2

What is “supply”?

Answer 2

Supply is the quantity of a product that suppliers are willing and able to supply to a market at a given price, at a particular time.

Question 3

What do supply and demand diagrams show?

Answer 3

They plot the quantity (Q) of a product in supply or demand against a range of different prices (P) of the product, using two curves: one for demand and one for supply.

Question 4

Why does the demand curve slope downwards?

Answer 4

Because as the price of a product increases, the demand decreases. At higher prices, fewer buyers will be able or willing to buy the product.

Question 5

Why does the supply curve slope upwards?

Answer 5

Because the higher the price charged for a product, the higher the quantity supplied.

Question 6

How do higher profits influence producers and sellers?

Answer 6

Higher profits incentivize producers and sellers to maximize their production and expand output, leading to an increase in supply.

Question 7

What happens when prices increase for firms with low production costs?

Answer 7

Firms with low production costs can produce more if the price increases by more than their costs.

Question 8

What is equilibrium price?

Answer 8

It is the price at which the quantity demanded matches the quantity supplied, where the demand and supply curves meet.

Question 9

What happens when the price of a product increases above equilibrium?

Answer 9

A surplus occurs because the quantity supplied exceeds the quantity demanded.

Question 10

What happens when the price of a product decreases below equilibrium?

Answer 10

A shortage occurs because the quantity demanded exceeds the quantity supplied.

Question 11

What is the relationship between price and quantity on a supply curve?

Answer 11

As price increases, the quantity supplied typically increases.

Question 12

How is a surplus shown on a supply and demand diagram?

Answer 12

A surplus is shown as the horizontal distance between the quantity supplied and the quantity demanded above the equilibrium price.

Question 13

How is a shortage shown on a supply and demand diagram?

Answer 13

A shortage is shown as the horizontal distance between the quantity demanded and the quantity supplied below the equilibrium price.

Question 14

Draw a supply and demand diagram.

Question 15

Draw a supply and demand diagram, when price increases

Question 16

Draw a supply and demand diagram, when price decreases

Question 17

What factors can cause a shift in the demand curve?

Answer 17

Substitutes, complementary products, consumer income, fashion and consumer preferences, advertising and branding, demographics, seasonal changes, and external shocks.

Question 18

How do substitutes influence demand?

Answer 18

If the price of a substitute product increases, the demand for the related product will rise. For example, if margarine prices rise, butter demand might increase.

Question 19

What are complementary products, and how do they affect demand?

Answer 19

Complementary products are used together (e.g., printers and ink). If the price of one increases, demand for the other might fall.

Question 20

How does consumer income affect demand?

Answer 20

Higher income can lead to increased demand for expensive products, while lower income increases demand for cheaper goods and services.

Question 21

How do fashion and consumer preferences influence demand?

Answer 21

Trends or health warnings can shift demand. For example, warnings about sugary drinks can reduce demand for them and increase demand for healthier alternatives.

Question 22

How do advertising and branding affect demand?

Answer 22

Effective advertising increases demand by persuading customers to be loyal to a product and by attracting new buyers.

Question 23

How do demographics influence demand?

Answer 23

Changes in population characteristics, like an aging population, can lead to increased demand for products and services tailored to specific groups.

Question 24

What seasonal changes affect demand?

Answer 24

Demand for certain goods fluctuates with seasons. For example, winter increases demand for heating, while summer boosts demand for ice cream.

Question 25

What are external shocks, and how do they affect demand?

Answer 25

External shocks, like threats of war, diseases, or extreme weather, can shift demand. For example, flooding increases demand for sandbags.

Question 26

What factors can cause a shift in the supply curve?

Answer 26

Costs of production, indirect taxes, subsidies, new technology, lower costs, weather conditions, and external shocks.

Question 27

How do production costs affect supply?

Answer 27

Higher production costs reduce supply as firms are less able to produce profitably at the same price.

Question 28

How do indirect taxes influence supply?

Answer 28

Higher indirect taxes increase production costs, reducing supply unless firms can raise prices.

Question 29

What role do subsidies play in supply?

Answer 29

Subsidies encourage businesses to produce more by lowering their costs, increasing supply.

Question 30

How does new technology impact supply?

Answer 30

New technology can increase supply by improving production efficiency and reducing costs.

Question 31

How do weather conditions affect supply?

Answer 31

Poor weather can reduce supply for agricultural goods, while good weather can increase it.

Question 32

What are external shocks that affect supply?

Answer 32

Events like wars, trade restrictions, or natural disasters can reduce supply by disrupting production.

Question 33

What causes a demand or supply curve to shift?

Answer 33

Changes in the market, such as consumer preferences, costs of production, or external factors, can shift the demand or supply curves to the left or right.

Question 34

What happens to the demand curve when demand increases?

Answer 34

The demand curve shifts to the right. At the original price, there’s a shortage, so the price rises to clear the market of excess demand. A new equilibrium is reached at a higher price and quantity.

Question 35

What happens to the demand curve when demand decreases?

Answer 35

The demand curve shifts to the left. At the original price, there’s a surplus, so the price falls to clear the market of excess supply. A new equilibrium is reached at a lower price and quantity.

Question 36

What happens to the supply curve when supply increases?

Answer 36

The supply curve shifts to the right. At the original price, there’s a surplus, so the price falls to clear the market of excess supply. A new equilibrium is reached at a lower price and higher quantity.

Question 37

What happens to the supply curve when supply decreases?

Answer 37

The supply curve shifts to the left. At the original price, there’s a shortage, so the price rises to clear the market of excess demand. A new equilibrium is reached at a higher price and lower quantity.

Question 38

What is the relationship between shifts in supply and demand curves and equilibrium?

Answer 38

Any shift in the supply or demand curve will change the equilibrium price and quantity.

Question 39

What is a key diagram rule to remember for supply and demand shifts?

Answer 39

A price change causes a movement along the curves, but shifts in the curves are caused by non-price factors.

Question 40

How does an increase in demand affect equilibrium price and quantity?

Answer 40

Both the equilibrium price and quantity increase.

Question 41

How does an increase in supply affect equilibrium price and quantity?

Answer 41

The equilibrium price decreases, while the equilibrium quantity increases.