DD/SS 1

Question 1

Define market equilibrium.

Answer 1

It is a position from which there is no inherent tendency for change and is achieved at a price where quantity demanded equals to quantity supplied.

Question 2

Define demand.

Answer 2

Demand refers to the amount of good that consumers are willing and able to purchase at each given price over a given period of time.

Question 3

Law of Demand.

Answer 3

LOD states that price is inversely related to quantity demanded, ceteris paribus.

Note: LOD affects market demand curve
LDMU affects individual curve.

Question 4

Name two reasons for LOD. ( Hint: used to explain change in quantity demanded)

Answer 4

1. Substitution effect: The effect of a change in the price of the good on its quantity demanded arising from the consumer switching to or from alternative products, ceteris paribus.
2. Income effect: When a change in the price of the good affects consumers real income or purchasing power and affects consumers’ ability to buy the good.

Question 5

Why is dd curve downwards sloping?

Answer 5

-The market demand curve for a product is downward sloping because it is a horizontal summation of all individual consumer’s demand curve.
-Each individual consumer’s demand curve is downward sloping due to the law of diminishing marginal utility which states that beyond a certain point of consumption, each extra unit consumed gives less additional utility than the previous.
-Since the rational consumer seeks to maximise her utility, when the consumer’s satisfaction from each additional unit falls, the maximum price she is willing to pay for each additional unit will fall.

Question 6

!! Factors causing leftward/rightward shift of dd curve
Kw: more/less willing and able to…

Answer 6

• Change in taste and preferences
• Seasonal changes/ climate ( under taste and pref)
• Derived DD
• Expectation of future prices
• Income (YED)
• Price of related goods (CED)
• Gov policies (direct subsidies/tax, i/r and e/r)
• Population

Question 7

Differentiate derived dd from complements.

Answer 7

Derived dd- demand for factors of production/ raw materials derived from demand of final good
Complements- goods used in conjunction to satisfy same want

Question 8

Define supply.

Answer 8

It refers to the quantity of a good or service that producers are willing and able to offer for sale at each given price over a period of time.

Question 9

Define Law of Supply.

Answer 9

The quantity supplied is directly related to the price of a product.

Question 10

Why is ss curve upward sloping?

Answer 10

• The market supply curve for a product is the horizontal summation of all perfectly competitive firms’ marginal cost curves in the market.
• The law of diminishing marginal returns which states that as more variable inputs (eg labor) are added to the fixed input (eg land), eventually overcrowding of the fixed factor (land) of production will take place, hence the addition to total output will eventually fall. Marginal cost will increase.
• The rational producer seeks to maximise profit. Hence when the farmer’s marginal cost of producing each additional unit increases, the minimum price she must receive must increase so that it is profitable to produce that unit. The rational producer will only produce those units where the price he actually receives is equal to or more than the marginal costs of production. P>=Mc

Question 11

!! Factors causing leftward/rightward shift of ss curve.’
Kw: COP, profitability, incentivise

Answer 11

• COP
• Innovation (increase productivity of FOP>each unit of factor produces more>average cost lower)
• Gov policies ( indirect tax/subsidy)
• Natural factors
• Number of firms
• Price of related goods ( joint supply and competitive supply)

Question 12

Difference between joint supply and competitive supply. Give eg.

Answer 12

Joint supply: from a singe product (eg beer and leather from cows)

Competitive supply: compete for the same resources (eg corn for consumption vs biofuel using land)

Question 13

Steps for PAM.

Answer 13

1. Shortage/surplus (identify in graph, look at original price)
2. upward/downward pressure on price
   3.- surplus: to sell off surplus, producers lower price>consumers more willing and able to buy, increasing qty dd. Px fall>lower profitability>producers disincentivised to produce, decreasing qty ss
   - shortage: consumers outbid e/o>Px rise>higher profitability>producers incentivised to increase qty ss>consumers less willing and able to buy, decrease qty dd
3. process repeats until shortage/surplus eliminated.

Question 14

3 steps for shift in dd/ss effect on price.

Answer 14

1. Identify whether demand or supply has shifted. Justify.
2. Decide direction of curve shift.
3. PAM

Note:
- bring elasticities
- combined shift effect is dependent on magnitude.

Question 15

Impact: what to mention