Chapter 2 - Supply & Demand

Question 1

What is a predictable outcome?

Answer 1

A single shift in the supply or demand curve.

Question 2

How does an increase in demand affect supply and price?

Answer 2

It will increase the quantity supplied and increase the price

Question 3

How does a decrease in demand affect supply and price?

Answer 3

It will decrease the quantity supplied and decrease the price.

Question 4

How does an increase in supply affect demand and price?

Answer 4

It will decrease the price so the quantity demanded will rise.

Question 5

How does a decrease in supply affect demand and price?

Answer 5

It will increase the prices so the quantity demanded will decrease.

Question 6

What is the equilibrium process?

Answer 6

Equilibrium is a state of balance, where the market is unbalanced and so causing either a surplus or a shortage, the equilibrium process will adjust the price in order to restore Equilibrium.

Question 7

How would a substitute good’s price change when there is an increase in demand

Answer 7

It would decrease, as more people would be buying the substitute instead of the product.

Question 8

How would a complementary good’s price change when there is an increase in demand?

Answer 8

It would increase, because it is a complementary product it will move in the same direction.

Question 9

What is an unpredictable outcome?

Answer 9

When there is an increase in supply and a decrease in demand or vice versa. It is unpredictable because we do not know what will happen to the quantity, but we do know that prices would fall.

Question 10

What are external influences on market outcomes?

Answer 10

• Government imposing a tax on a product or on income
• Application of a minimum price for a product or
• Application of a maximum price for a product.

Question 11

What are the problems with setting a minimum price?

Answer 11

A price floor causes an opportunity cost - money is tied up in a product no one wants. Plus supply may increase as producers want certainty as to earners, so there is likely to be a greater surplus created.

Question 12

What will occur if a maximum price is set on a product?

Answer 12

Because the market cannot move to price the product equivalent to demand, either, (1) non market rationing will need to occur (ie a limit on purchase) and (2) a black market is likely to occur because people are willing to pay more.

Question 13

What is another factor on the market?

Answer 13

Other influences, such as Unions and social capital reasons. Businesses are driven by profit, but sometimes they are unable to make decisions.

Question 14

What is a market?

Answer 14

A market is any institutional structure or mechanism that brings buyers and sellers of goods and services together.

Question 15

Where do markets exist?

Answer 15

Locally, nationally and internationally and they may be face to face or impersonal

Question 16

How does demand and supply work within a market?

Answer 16

They set the price and quantity of the goods and services transacted.

Question 17

What is a perfectly competitive market?

Answer 17

One which has a large number of independently acting buyers and sellers and a standardised product, eg. livestock or the share market.

Question 18

What is demand?

Answer 18

It is the various (quantity) amounts of product that consumers are willing and able to purchase at various prices during a specified period.

Question 19

How is demand represented?

Answer 19

It is demonstrated by the demand schedule and the demand curve.

Question 20

What is the law of demand

Answer 20

It is the inverse relationship between the price and the quantity demanded of a good or service during the specified period. Ie. all other things being equal when the price of a good goes up, quantity demanded falls and vice versa.

Question 21

What is the rationale behind the law of demand?

Answer 21

• Common sense and simple observation
• Diminishing marginal utility
• Income and substitution effects

Question 22

What is diminishing marginal utility?

Answer 22

‘Satisfaction’ decreases with each additional unit acquired, so consumers will only buy more if the price is reduced.

Question 23

What are income and substitution effects?

Answer 23

Income affects demand because more can be afforded without giving up other goods and services. Substitution suggests consumers will select the cheaper good over the one now more expensive.

Question 24

What does the demand curve show?

Answer 24

The inverse relationship between price and quantity demanded for a good or service and is derived from a demand schedule that shows the quantity demanded at various price points.

Question 25

What is demand determined by?

Answer 25

• taste or consumer preference
• number of consumers
• Income of consumers
• prices of related goods
• Expectations about future prices and income

Question 26

What are changes of demand caused by?

Answer 26

Changes in the non-price determinants of demand and represented by the demand curve shifting right (positive) or left (negative).

Question 27

What are two ways that income can affect goods?

Answer 27

Normal/superior goods - are demanded more when incomes rise - eg steak & red wine
Inferior goods - are demanded more when income falls - eg mince & apples

Question 28

Prices of related goods may also shift the demand curve for a product depending on whether the product is what?

Answer 28

• A substitute good - can be used in place of another - butter & margarine
• A complementary good - is used in conjunction eg Tea and milk
• An independent good - not related at all.

Question 29

How does a graph change when there is a change in the quantity demanded (opposed to a change in demand)?

Answer 29

It moves along the demand curve.

Question 30

What is the law of supply?

Answer 30

It is the direct relationship between price and the quantity supplied, with a price increase, quantity supplied increases. Supply and price move together.

Question 31

What are the rationale behind the law of supply?

Answer 31

1) common sense and simple observation
2) Price as revenue per unit and an incentive to produce and sell a product
3) declining productive efficiency and rising costs.

Question 32

what are the determinants of supply that will shift the supply curve left or right?

Answer 32

• resource prices
• technology breakthroughs
• prices of other goods
• expectations about future prices and economic activity
• the number of sellers in the market.

Question 33

How does a shortage occur?

Answer 33

Excess demand occurs when the quantity demanded exceeds the quantity supplied at the current price. Competition amongst buyers eventually bids up the price until equilibrium is reached.

Question 34

How does a surplus occur?

Answer 34

Excess supply occurs when the quantity supplied exceeds the quantity demanded at the current price and when competition amongst producers eventually causes the price to decline until equilibrium is reached.