B1/C1/D1/E1: How Markets Work

Question 1

What is meant by ‘Demand’?

Answer 1

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

Question 2

What is meant by the phrase ‘ceteris paribus’?

Answer 2

“All other things being equal/unchanged”

Question 3

What is the ‘Law of Demand’

Answer 3

There is an inverse relationship between price and quantity demanded: as price increases, quantity demanded falls and vice versa assuming ceteris paribus

Question 4

Why is the Demand Curve downward sloping?

Answer 4

1. Income Effect: as price increases, our purchasing power decreases and our income is able to buy less quantity than before and therefore the demand curve contracts
2. Substitution Effect: as price increases, others goods and services become more price competitive and we switch our consumption/demand to those goods instead and therefore the demand curve contracts.

…ASSUMING CETERIS PARIBUS

Question 5

What are non-price factors that affect demand?

Answer 5

Population
Advertising
Substitute’s Price
Income
Fashiong/Tastes
Interest Rates

Question 6

What is meant by ‘Supply’?

Answer 6

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

Question 7

What is the ‘Law of Supply’?

Answer 7

There is a direct relationship between price and quantity supplied: as price increases, quantity supplied increases and vice versa assuming ceteris paribus

Question 8

Why is the Supply Curve upward sloping?

Answer 8

Profit Motive: firms have a profit motive where they want to maximise their profits so as price increases, quantity supplied increases and vice versa

…ASSUMING CETERIS PARIBUS

Question 9

What are non-price factors of Supply?

Answer 9

Productivity
Idirect Taxes
Number of firms
Technology
Subsidies
Weather
Costs of Production: transport, labour, raw materials, regulation, utilities, oil and etc