Chapter 2

Question 1

Law of Demand

Answer 1

LoD states that as the Price of a product Rises, the demand for that product Falls. Conversely, as the Price falls, demand rises.

Question 2

Movements along the Curve

Answer 2

Movements occur due to changes in price of a product. An increase in price leads to a contraction of the demand curve and a expansion of the supply curve

A decrease in price leads to an expansion of the demand curve and contraction of the supply curve.

Question 3

Non-Price factors Affecting Demand (6)

Answer 3

• Disposable Income
• Price of Complements or Substitutes
• Interest Rates
• Population Growth
• Consumer Confidence
• Consumer Preferences

Question 4

Complementary Goods

Answer 4

Goods that are consumed together but sold separately.

Question 5

Substitute Goods

Answer 5

Substitute goods are those goods which can be used in place of each other to satisfy a given want.

Question 6

Law of Supply

Answer 6

Since we assume that businesses want to maximise their profit, as price of a good or service increases, producers are more willing to produce, therefore supply increases.

Conversely, if price decreases, producers are less willing to produce and therefore supply decreases.

Question 7

Non-Price Factors affecting Supply

Answer 7

Since businesses are Profit motivated, these factors can affect their willingness or ability to supply.
- Costs of Production
- Productivity
- Factors of Production (Resources)
- Technological Change (Productivity Growth)
- Adverse Climatic Conditions

Question 8

Price Elasticity of Demand (Formula) + Definition

Answer 8

% Change in Quantity Demanded / % Change in Price

Refers to how responsive consumers are to a change in price for a product.

Question 9

What does it mean when:
a) PED > 1
b) PED < 1

Answer 9

a) If PED > 1, then it has Elastic Demand
- Consumers are sensitive to a change in price
- The Higher PED is the more sensitive consumers are to changes in price.

b) If PED < 1, then it has Inelastic Demand
- Consumers are Insensitive to a change in price

Question 10

Factors Affecting PED

Answer 10

1. Degree of Necessity
   - If consumers need it more: Inelastic demand, conversely, if it’s not a necessity then there will be Elastic Demand
2. Availability of Substitutes
   - High number of substitutes = Elastic (eg. Junk food)
   - Not many substitutes = Inelastic (eg. Petrol)
3. Proportion of Income the Purchase Represents:
   - If Expensive / Large Proportion: Elastic
   - If NOT Expensive / Small Proportion: Inelastic

Question 11

Price Elasticity of Supply (Formula + Definition)

Answer 11

PES = % Change in Quantity Supplied / % Change in Price

PES is concerned with the responsiveness of suppliers to a change in price. How does a change in price influence a producer’s ability or willingness to produce.

Question 12

Factors affecting PES

Answer 12

1. Production Period:
   How long it takes for producers to make more of a product:
   - Short time (eg. Bicycle): Supply would be elastic
   - Long time (eg. Avocados): Supply would be inelastic
2. Spare Capacity (idle / unused resources):
   - Lots of Spare Capacity = High Elasticity
   - Small amount of Spare Capacity: Low Elasticity / Inelastic
3. Durability of Goods
   - High durability (eg. canned foods): High Price Elasticity
   - Low durability (eg. vegetables): Low price Elasticity