Chapter 3 - demand supply and price

Question 1

conditions of demand

Answer 1

• level of disposable income (normal/inferior good)
• price of substitutes
• price of complements
• tastes and preferences
• market expectations

Question 2

conditions of supply

Answer 2

• costs of production
• availability of resources
• indirect taxes/subsidies #
• prices of substitutes in production

Question 3

removal of shortage

Answer 3

firms will increase prices and extend supply by transferring resources to this product to get higher profits

Question 4

removal of surplus

Answer 4

rise in unsold products so firms cut prices and supply
p falls = demand extends and consumers attracted by fall in price

Question 5

price mechanism functions

Answer 5

signalling
allocating
rationing
rewarding