Chapter 5 - Demand & Supply In Action

Question 1

Name 4 possible sources of an increase in demand.

Answer 1

• increase in price of a substitute product
• increase in consumer’s income
• greater consumer preference for the product
• an expected increase in the price of the product

Question 2

What happens to supply when demand increase?

Answer 2

Remains the same.

Question 3

What will be the result if there is a decrease in demand?

Answer 3

Price of the product will decrease.

Question 4

What happens when supply increases?

Answer 4

Price of the product will fall

Question 5

What reasons would cause a shift in the supply curve?

Answer 5

• fall in price of an alternative product
• cheaper factors of production
• improvement in the productivity of the factors of production

Question 6

What happens when there are simultaneous changes in demand & supply?

Answer 6

It will be impossible to predict a precise outcome to equilibrium prices and quantities.

Question 7

How can government intervene to influence prices?

Answer 7

• setting max prices (price ceilings)
• setting min prices (price floors)
• subsidising certain products or activities
• taxing certain products or activities

Question 8

Give 4 possible reasons why government sets maximum prices.

Answer 8

• keep prices low on basic food to assist the poor
• avoid the exploitation of consumers
• combat inflation
• limit the production of certain goods and services (eg wartime)

Question 9

What causes could setting the prices below the equilibrium have?

Answer 9

• create shortages
• prevents the market mechanism from allocating the available quantity among consumers
• stimulate black market activities

Question 10

When government fixes a minimum price above the equilibrium price it creates surpluses. This requires further government intervention. What are those?

Answer 10

• government purchases the surplus & exports it
• government purchase the surplus & stores it provided it is non-perishable
• government introduces production quotas to limit supply and demand at minimum price.
• government purchase & destroy it
• producers destroy the surplus

Question 11

Setting prices above equilibrium prices is highly inefficient. Name 4 reasons why.

Answer 11

• all consumers including poor pay artificially high prices
• bulk of benefit goes to large producers
• inefficient producers are protected
• disposal of surpluses add more costs to taxpayers

Question 12

Does the price of a product cause a change in demand or supply as illustrated by a shift of the demand curve or the supply curve?

Answer 12

No, only a change in any other determinant of demand or supply.