2.1 Demand and Supply curves

Question 1

Define the term “Demand”

Answer 1

The quantity of a good/service consumers are willing and able to buy at a given price in a given time period.

Question 2

Define the term “Law of Demand”

Answer 2

The law of demand states that there is an inverse relationship between price and quantity demanded.

Question 3

Define the term “Ceteris Paribus”

Answer 3

All other factors remain unchanged.

Question 4

Explain the Income Effect on demand.

Answer 4

If prices increase, there will be a contraction in demand due to the decrease of purchasing power. Similarly, if the prices decrease there will be a extension of demand as people will have more purchasing power.

Question 5

Explain the Substitution Effect.

Answer 5

As prices increase, other goods and services become more price competitive so consumers may switch their demand towards buying those other goods/services instead.

Question 6

What are the non-price factors that affect demand?

Answer 6

• Population : As the population increases there will be an increase in demand whereas if the population decreases there will be a decrease in demand.
• Advertising : If the advertisement was good and attractive there will be an increase in demand. Whereas if the advertisement was not up to standards there will be a decrease in demand.
• Substitute Price : If a competitors price decreased there will be a decrease in demand for this specific good/service as consumers will switch to purchasing from them instead. Similarly, if the price of competitors increase, there will be an increase in demand for this specific good/service as consumers will switch from the other good/service to this one.
• Income : If the consumer’s income increases they will have more purchasing power which will lead to an increase in demand. Whereas if the income of the consumer’s decreased, there will be a decrease in demand as they have less purchasing power.
• Fashion : A change in fashion may lead to a decrease in demand as people no longer desire this good/service. Similarly, if consumer fashion changed positively, this will lead to an increase in demand as more consumers desire this good/service.
• Interest rates : An increase in interest rates will lead to a decrease in demand as the consumers will be reluctant to borrow money considering the high interest rates. Whereas a decrease in interest rates will lead to an increase in demand as more consumers will be confident to borrow money to purchase goods/services.
• Complement’s Price : When the demand of a good/service is affected by an increase in price of another good/service. For example, if the cost of printers increased, the demand of ink for printers will decrease considering consumers are not purchasing as much printers and vice versa.

Question 7

Define the term “Contraction of Demand”

Answer 7

As the price decreases, this will lead to an increase in quantity demanded.

Question 8

Define the term “Extension of Demand”

Answer 8

As the price increases, this will lead to a decrease in quantity demanded.

Question 9

Define the term “Supply”

Answer 9

The quantity of a good/service that producers are willing and able to produce at a given price in a given time period.

Question 10

Define the term “Extension of Supply”

Answer 10

As the supply increases, the quantity increases resulting to it moving up the supply curve.

Question 11

Define the term “Contraction of Supply”

Answer 11

As the supply decreases, the quantity decreases resulting to it moving down the supply curve.

Question 12

Define the term “Law of Supply”

Answer 12

There is a direct relationship between price and quantity supplied.

Question 13

What is the reason of the direct relationship between the price and quantity supplied?

Answer 13

Profit motive.

Question 14

What are the non-price factors that affect the supply?

Answer 14

• Productivity : When referring to labor productivity, there will be an increase in production and a decrease in cost of production as the labor are being paid the same whilst they are generating a higher output.
• Indirect tax : Tax of production, if there is an increase in indirect tax the cost of production will increase which will lead the supply curve to shift to the left. Similarly, if the indirect tax is decreased the cost of production will decrease which will lead to a shift to the right on the supply curve.

*No. of firms : As the number of firms in the market increases, quantity supplied will increase which will cause the supply curve to shift the right and vice versa.

• Technology : An improvement in technology decreases cost of production which will lead the supply curve to shift to the right and vice versa.
• Subsidy : A money grant given by the government to lower cost of production which will shift the supply curve to the right. Whereas if the subsidy was decreased or taken away the cost of production will increase leading the supply curve to shift to the left.

*Weather : Weather may affect different production processes depending on how it can positively or negatively affect it.

• Costs of production : All the things that can affect the cost of production such as : utilities, transport cost, labor cost, material cost and so on…