Chapter 3

Question 1

Defn. Demand

Answer 1

the amount of goods and services consumers are willing and able to buy at various prices over a period of time, ceteris paribus

Question 2

Law of Demand

Answer 2

states that in a given time period, the quantity demanded of a good is inversely related to its price, ceteris paribus

Question 3

Law of diminishing marginal utility

Answer 3

explains that incremental units of satisfaction/utility diminishes as an individual consumes more units of a good

Question 4

Defn. Supply

Answer 4

the amount of goods and services producers are willing and able to sell over a given period of time, ceteris paribus

Question 5

Law of supply

Answer 5

states that in a given time period, the quantity supplied of a good is directly related to its price, ceteris paribus

Question 6

Factors affecting DD

Answer 6

1. Changes in expectation of future prices
2. Changes in govt. policies
3. Changes in consumer’s income
4. Changes in price of related goods/ population
5. Changes in consumer’s taste and preference
6. Others - change in season, availability of credit and hire purchases

EGYPTO

Question 7

Normal goods

Answer 7

when income increases, purchasing power increases, dd curve for normal goods shift to the right (eg. new furniture)

Question 8

Inferior goods

Answer 8

Inferior goods: when income increases, purchasing power decreases, dd curve for inferior goods shift to the left (eg. second-hand furniture)

Question 9

Substitute goods

Answer 9

an alternative good that can replace another because it satisfies the same wants
-> change in price for one of the good causes the demand for the other good to change in the same direction

Question 10

Complementary goods

Answer 10

a good which must be used at the same time with another to satisfy the same wants
-> change in price for one of the good causes demand for the other good to change in the opposite direction

Question 11

Factors affecting SS

Answer 11

1. Changes in weather conditions
2. Changes in expectation of future prices
3. Changes in technology
4. Changes in production of related goods
   5.Changes in price of factor inputs (factors of production - land, labour, capital, entrepreneurship)
5. Changes in gov. policies
6. Changes in no. of suppliers

WETPIGS

Question 12

Goods in competitive/ substitute supply

Answer 12

a good that uses some of the same resources as another good under consideration (eg. butter and cheese because milk)

Question 13

Goods in joint supply

Answer 13

where production of more of one good leads to the production of more of the other good (eg. beef and leather)

Question 14

Consumer surplus

Answer 14

Difference between what the consumer is willing and able to pay for a good and the actual price paid for it.

Question 15

Producer surplus

Answer 15

Difference between actual price received for supplying a good and what the producer is willing and able to accept for supplying a good.

Question 16

Total surplus

Answer 16

= Consumer surplus + Producer surplus

Question 17

Price adjustment process

Answer 17

An increase in demand will shift the demand curve rightwards from D0 to D1.
At the original price, P0, this creates a shortage of Q0Q2 since quantity demand (Q2) exceeds quantity supplied (Q0).
The shortage puts an upward pressure on price, causing quantity supplied to rise and quantity demanded to fall.
The adjustment process continues until the new equilibrium price and quantity is reached at P1 and Q1 respectively
Hence, an increase in demand causes a rise in equilibrium price from P0 to P1 and equilibrium quantity from Q0 to Q1
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An increase in supply shifts the supply curve rightwards from S0 to S1.
At the original price P0, this creates a surplus of Q2Q0 since quantity supplied (Q0) excess quantity demanded (Q2).
The surplus puts a downward pressure on price, causing quantity demanded to rise and quantity supplied to fall,
The adjustment process continues until the new equilibrium price and quantity is reached at P1 and Q1 respectively.
Hence, an increase in supply causes a fall in equilibrium price from P0 to P1 and equilibrium quantity from Q0 to Q1.

Question 18

Causes of shortage

Answer 18

• Unanticipated rise in demand
• Unanticipated reduction in supply
• Underestimation of demand by producers producing goods
• Government intervention such as price ceiling

Question 19

Effects of shortage

Answer 19

• Queuing
• Panic buying and rationing
• Formation of resale market and black market

Question 20

Causes of surplus

Answer 20

• Unanticipated rise in supply
• Unanticipated fall in demand
• Overestimation of demand by producers producing goods
• Government intervention such as price floor

Question 21

Effects of surplus

Answer 21

• Wastage of resources
• Rising cost for firms

Question 22

Defn. Allocative efficiency

Answer 22

There is an optimal amount of each good and service being produced and consumed. occurs when total surplus is at its maximum