competitive markets section 2

Question 1

What is demand?

Answer 1

The quantity of a product, consumers are willing and able to buy at different prices in a specified time period

Question 2

What is the relationship between the price of a good and the quantity demanded?

Answer 2

There is typically an inverse relationship: as the price of a good increases, the quantity demanded decreases, and as the price decreases, the quantity demanded increases.

Question 3

what are the Factors that affect demand

Answer 3

Consumer tastes and preferences
Income available to the consumer
Prices of other goods and services
Substitute goods
Complementary goods
Consumer population

Question 4

What is the definition of effective demand in economics?

Answer 4

Effective demand is the desire to buy a product or service that is backed by the ability to pay for it, meaning consumers have sufficient purchasing power to make the purchase.

Question 5

What two elements are required for effective demand to exist?

Answer 5

A consumer must have both a desire to buy a product and the ability to pay for it (sufficient purchasing power).

Question 6

What is latent demand

Answer 6

Latent demand exists when there is a willingness to purchase a good, but the consumer lacks the real purchasing power to afford the product.

Question 7

What factor can influence latent demand

Answer 7

Latent demand is affected by persuasive advertising – where the producer is seeking to influence consumer tastes and preferences

Question 8

What is derived demand

Answer 8

Derived demand occurs when the demand for one good is dependent on the demand for another related good.

Question 10

what is joint supply

Answer 10

Where an increase/decrease in supply of one good leads to an increase/decrease in supply of another

Question 11

What is composite demand in economics?

Answer 11

Where goods have more than one use – an increase in the demand for one leads to a fall in supply of the other

Question 12

How does composite demand apply to a good like milk?

Answer 12

Milk – used for cheese, yoghurts, cream, butter, etc.
If more milk is used for cheese, ceteris paribus there is less available for butter

Question 13

What is the substitution effect

Answer 13

The substitution effect occurs when a price increase causes consumers to switch to cheaper alternatives or ration their spending

Question 14

What is the income effect?

Answer 14

The income effect occurs when a price increase reduces consumers’ purchasing power, meaning they can afford to buy less of the good, leading to a decrease in quantity demanded.

Question 15

What does equilibrium mean in economics?

Answer 15

Equilibrium is a state of equality between demand and supply, where the quantity demanded equals the quantity supplied at a particular price.

Question 16

What happens to the market price if there is no shift in demand or supply?

Answer 16

if there is no shift in demand or supply, there will be no change in the market price, and the market remains at equilibrium

Question 17

What is excess demand?

Answer 17

: Excess demand occurs when the quantity demanded exceeds the quantity supplied at a given price, leading to a market shortage.

Question 18

What is excess supply?

Answer 18

Excess supply occurs when the quantity supplied exceeds the quantity demanded at a given price, leading to a market surplus. This usually happens when the market price is above the equilibrium price.

Question 19

What causes the supply curve to shift outward?

Answer 19

A fall in the costs of production (e.g., a decrease in labour or raw material costs)
A government subsidy that reduces producers’ costs for each unit supplied
Favourable climatic conditions leading to higher yields for agricultural commodities
A fall in the price of a substitute in production
An improvement in production technology, increasing productivity and efficiency
The entry of new suppliers into the market, increasing total market supply

Question 20

what is the law of supply?

Answer 20

As the market price of a commodity rises, producers expand their supply onto the market.

Question 21

What does a supply curve show?

Answer 21

A supply curve shows the relationship between the price and the quantity a firm is willing and able to sell.

Question 22

What does “quantity supplied” refer to?

Answer 22

The amount of a good or service that producers are willing and able to offer for sale at a specific price.

Question 23

How is the law of supply related to price changes?

Answer 23

According to the law of supply, as the price of a good or service rises, the quantity supplied increases, and vice versa

Question 24

Why do supply curves typically slope upward?

Answer 24

Supply curves slope upward because, as the price increases, the quantity supplied increases, reflecting the incentive for producers to produce more at higher prices.

Question 25

How do rising prices act as an incentive for producers?

Answer 25

Rising prices allow producers to earn higher profits, motivating them to expand production and supply more goods to the market.

Question 26

What role does the law of diminishing returns play in supply?

Answer 26

As production increases, the cost of production typically rises due to diminishing returns. Higher prices compensate producers for these increased costs, encouraging them to supply more.