block 2 - demand, supply and the market

Question 1

what does the market demand for a good show

Answer 1

the quantity of the good buyers are willing and able to buy at each price

Question 2

what is the market supply of a good

Answer 2

shows the quantity of a good that sellers are willing to produce and offer for sale at each price

Question 3

when is the term

1. change in quantity demanded and quantity supplied
2. chang demand and supply used

Answer 3

1. when the price of the good itself changes
2. when other determinants (other than the price of the good itself) changes == shift in the demand and supply curve

Question 4

what is a competitive market in the absence of externality

Answer 4

it is efficient - situation where it is impossible to make one part better off without making the other party worse off

occurs when the output produced is where P = MC where the consumer and producer surplus is maximum and there is no deadweight loss

Question 5

what is consumer surplus

Answer 5

the difference between the price consumers pay for the produce and what he is willing to pay

it is the gain to customers

Question 6

what is producer surplus

Answer 6

the difference between the amount at which the producer is willing to supply and the actual market price the producer seceives

Question 7

how may the government intervene to regulate the market

Answer 7

it can introduce price controls to keep prices from rising above a certain level or to keep prices from falling below a certain level

Question 8

what is a price ceiling and what are the consequences

Answer 8

a legal maximum price a seller can charge
- imposed when the equilibrium price is regarded as too high

consequences:
1. excess demand/ shortage but price cannot rise to clear the market
2. not all benefit from a price ceiling

Question 9

what is a price floor and what are its consequences

Answer 9

a legal minimum price charged for a product or service
- imposed if the equilibrium price is regarded as too low
- set above equilibrium price

consequence :
1. surplus result but price cannot fall to clear the market
2. in the case of agricultural price support (imposed as farm lobbies have convinced the govt that theyre not earning enough), the government will buy any surplus

Question 10

what is the consequence of the presence of price controls

Answer 10

results in an inefficient market outcome
- loss in social surplus/ theres deadweight loss

Question 11

what causes an increase in demand

Answer 11

1. increase in price of substitutes
2. decrease in price of compliments
3. increase in income ( normal goods)
4. decrease in income ( inferior goods)
5. change in taste in favour of the good
6. expect price to increase in the future

Question 12

what causes demand to decrease

Answer 12

1. decrease in price of substitutes
2. increase in price of compliments
3. decrease in income (normal good)
4. increase in income (inferior good)
5. change in taste against the good
6. expect price to decrease in the future

Question 13

what causes supply to decrease

Answer 13

1. increase in factor price
2. tax
3. decline in technology
4. expect price to increase in the future (sell less now and buy more later on)

Question 14

what causes supply to increase

Answer 14

1. decrease in factor price
2. subsidy
3. improved technology
4. expect price to fall in the future

Question 15

what does the price elasticity of demand measure

Answer 15

measures the responsiveness of quantity demanded of a good to a change in its own price

Question 16

what are characteristics of PED

Answer 16

1. it’s negative
2. its a movement along the demands curve

Question 17

what is perfectly inelastic and perfectly elastic

Answer 17

perfectly inelastic: no change in quantity demanded when theres a change in price

perfectly elastic: quantity demanded drops to zero when price changes

Question 18

what are the determinants of PED 1

Answer 18

1. availability of substitutes:
   - more substitutes = more elastic the demand
   - the broader the definition, the less the substitutes
2. expenditure as a percentage of income
   - price changes matter more when the good uses up a larger share of one’s income (more elastic)
3. how important it is to the customer
   - luxury goods - demand elastic
   - necessity - inelastic
4. time
   - longer the time since the price change, the more elastic
   - more time = more substitutes available

Question 19

what is the link between PED and total revenue

Answer 19

revenue follows the variable that changes more

when demand elastic, total revenue follows the quantity demanded
(when price increase, quantity demanded decreases = total revenue decreases)

when demand is inelastic, total revenue follows price
(increase in price , quantity demanded decreases, total revenue increases)

Question 20

what is the effect of the tax on consumer/ producer if demand is more price inelastic/ elastic than supply

Answer 20

demand more inelastic than supply
- consumer bears a greater tax burden since consumers are not so responsive to price changes

when supply is more inelastic than demand
- producers bear a greater tax burden

Question 21

what does the cross price elasticity of demand measure

Answer 21

measures the responsiveness of quantity demanded of one good to a change in price of another good
(checks if 2 goods are substitutes/ compliments)

• (% change in quantity demanded of good X)/ (% change in price of good Y)

if +tve = goods the substitutes
if -ve = goods are compliments
if 0 = goods are unrelated

Question 22

what does the income elasticity of demand measure

Answer 22

the responsiveness of quantity demanded to a change in income
( determine if a good is a normal/ inferior good)

• (% change in quantity demanded) /(% change in income)

if +ve = normal good
0<IED<1 = necessity. 0<IED>1 = luxury</IED>

if -ve = inferior good

Question 23

what does the price elasticity of supply measure

Answer 23

the responsiveness of a quantity supplied to a change in the price of a good

• (% change in quantity supplied)/ (% change in price)

Question 24

what are the determinants of PES

Answer 24

1. spare capacity
2. time (oso linked with the availability of inputs)
3. factor mobility
4. flexibility of production
5. type of product