CH4:Price, Demand and Supply

Question 1

Definition: Market

Answer 1

A medium through which buyers and sellers of goods or services come together to trade

Question 2

What are the 4 types of market?

Answer 2

Goods - finished goods and services

Factor - trading the factors of production ; land, labour, capital, entrepreneurship (e.g. the job market)

Commodity - raw materials

Financial- shares and loans

Question 3

Definition: Demand

Answer 3

The extent to which consumers are willing and able to buy a good or service at any given price over a set time period

Question 4

What is the impact of a change in price on the demand curve (graphically)?

Answer 4

Changes in price cause a movement ALONG the demand curve: an EXTENSION (ie.increase) or CONTRACTION (decrease) of demand.

Question 5

Why does an inverse relationship typically arise between price and demand?

Answer 5

Consumers look to maximise their utility from their scarce resources (e.g. their income)

Question 6

Definition: Utility

Answer 6

The measurement of the amount of satisfaction/enjoyment a customer gets from consuming a given good or service

Question 7

What is another way to think about the relationship of price and demand (rather than inverse)?

Answer 7

Opportunity cost

Question 8

Definition: opportunity cost

Answer 8

The amount the individual has to give up in order to buy the good or service

(e.g. as the price rises, consumer has to give up more vs. other goods/services they could buy i.e. less value for money)

Question 9

What are the two types of demand?

Answer 9

1) Individual demand - demand for a specific product at one COMPANY
2) Aggregate demand - the demand for one product at any given price level in the WHOLE MARKET

Question 10

Other than price, what are some factors which impact the level of demand? (ie. if the price stays the same)

Answer 10

Levels of income - as income rises disposable income rises, consumers spend more, hence demand increases

Market expectations - if prices are expected to rise in the future, consumers will increase their expenditure in the short term

Size of the population - an increase in population in a specific area may result in a rise in demand for many goods

Competitor prices - substitutes goods? and complimentary goods?

Factors that impact consumer preferences - eg. fashion, taste, wether the good is inferior or normal will affect consumer preferences

Question 11

How do factors - other than price - impact the demand curve?

Answer 11

They cause a shift in the actual demand curve to the Right (an increase/rise in demand) or Left (decrease/fall in demand)

Question 12

Definition: Normal goods

Answer 12

Good whose demand increases as income increases e.g. branded products

Question 13

Definition: Inferior goods

Answer 13

Demand for these products tends to fall as income increases e.g. value range products

Question 14

Definition:Substitute goods

Answer 14

Goods that satisfy the same need for the buyer as the original product. if the price of the substitute is low, demand for the original good/service may decrease.

Question 15

Formula: Total consumer expenditure

Answer 15

Total consumer expenditure= Price x Quantity demanded

Question 16

Definition: Veblen Goods

Answer 16

Goods where demand increases as their price increases. Becomes more exclusive so demand increases (e.g. Rolex watch)

(i.e. they have an upward sloping demand curve vs. the usual downward sloping for most common goods where demand decreases as price increases)

Question 17

Definition: Veblen Goods

Answer 17

Goods where demand increases as their price increases. Becomes more exclusive so demand increases (e.g. Rolex watch)

(i.e. they have an upward sloping demand curve vs. the usual downward sloping for most common goods where demand decreases as price increases)

Question 18

Definition: Giffen Goods

Answer 18

Inferior, staple goods with NO substitutes, hence even if price increases consumers have no choice but to continue buying them so demand rises (e.g. rice in certain countries) .

Question 19

What are the classifications of a Giffen Good?

Answer 19

• Inferior good (i.e. a low cost, value product)
• has no substitutes
• its a staple good

Question 20

Definition: Supply

Answer 20

The extent to which companies are willing and able to supply a product at any given price over a set period of time

Question 21

True or false: “Supply is all about how buyers and sellers react differently to price?”

Answer 21

True

Question 22

What is the general assumption between price and supply

Answer 22

If all other factors remain equal, an increase in price will cause an increase in supply and visa versa

Question 23

What is the usual relationship between price and supply graphically/ illustrated by the supply curve?

Answer 23

Price changes cause a shift/movement ALONG the supply curve: an extension/expansion or contraction in supply

Extension of supply: increase in quantity supplied when price increases

Contraction of supply: decrease in quantity supplied when price decreases

Question 24

What is the relationship between price and supply and why does it occur?

Answer 24

Positive relationship

reason: supplying more at a higher price yields a higher profit per unit (i.e selling price per unit - cost to make the unit)

Question 25

Definition: Individual supply

Answer 25

Supply at an individual level e.g. an individual company’s supply schedule

Question 26

Definition: Market (aggregate) supply

Answer 26

Supply at the level of the market (e.g. the supply level of one product at any given price level from ALL SUPPLIERS in the market

Question 27

Give 2 examples of factors influencing AGGREGATE supply

Answer 27

1) Companies leaving or joining the market
2) Current suppliers increase or decrease production(eg. in reaction to price, they might switch to producing a more profitable product if price drops)

Question 28

Other than price, what are some factors which impact the level of Supply? (ie. if the price stays the same)

(*think as if you were the supplier hence want to make max profits per unit, what would impact how much goods you produce/supply?)

Answer 28

1) Costs associated with making the good/service - e.g. price of raw materials, or factors of production (labour, land, interest rate, profit expectations). As these costs increase, profitability per unit will decrease and hence quantity supplied decreases.
2) Price of substitutes - includes products that a company can readily/easily switch to producing (substitutes in supply) - changes in the price or cost of production for substitutes will alter supply
3) Market expectations - if suppliers expect prices will increase in the medium term, they may wait until the prices increase before releasing their products onto the market hence lower current supply
4) Number of competitors/companies in industry - as the number of companies rises, the level of supply increases
5) Technological changes - tech changes that affect the cost of production
6) Climate/weather - primarily affects companies int he primary sector (agriculture, building, oil extraction) - if weather conditions are good there is an increase in supply and visa versa

Question 29

How do factors - other than price - impact the the supply curve?

(i.e. even if the price remains the same)

Answer 29

the supply curve Shifts to the RIGHT (increase in supply) or LEFT (decrease)

Question 30

Definition: Equilibrium price

Answer 30

The price at which MARKET SUPPLY and MARKET DEMAND are balanced

Question 31

What impacts the equilibrium price?

Answer 31

A change in market demand or market supply.

note. market mechanism ensure point of disequilibrium (where the supply and demand curves do not intersect ) only exist in the short term hence both price and demand eventually meet at the equilibrium price.

Question 32

What will be the impact on supply/demand if the maximum price is set below the equilibrium?

Answer 32

Excess demand / shortage of supply

demand is greater than supply - suppliers sell their product a higher price so prices rise, eventually settling at the equilibrium price

Question 33

What will be the impact on supply/demand if the minimum price is set above the equilibrium?

Answer 33

Excess/ surplus supply

supply is greater than demand- suppliers sell their excess stock at a cheaper price, with prices eventually falling to the equilibrium price

Question 34

what is the right word to complete the sentence

“ —- is the long run end point”

Answer 34

Equilibrium

Question 35

In terms of demand and supply, what is the best way to make a company profitable?

Answer 35

Increase demand - shift of demand curve to the right hence both the equilibrium price and quantity demanded increases therefore total expenditure increases.

increasing the supply does not necessarily increase the profitability as it can push the price down (the equilibrium price drops /supply curve shifts to the right) can see this if you plot both the supply and demand curves graphically