DD/SS /PRICE MECH

Question 1

Definition of Demand:

Answer 1

Amount that consumers are WILLING and ABLE to purchase at a given price and time

Question 2

Law of Demand

Answer 2

Qd is inversely related to price, CETERIS PARIBUS

Question 3

2 EFFECTS OF LAW OF DEMAND

Answer 3

1. Income effect:
   - increase in price decreases real income/purchasing power -> willingness and ability to buy decreases -> demand decreases
2. Substitution effect:
   - increase in a good’s price makes substitute relatively cheaper -> consumers switch

Question 4

What is individual demand curve influenced by

Answer 4

LDMU

Question 5

NON PRICE DETERMINANTS OF DEMAND (8)

Answer 5

1. Tastes and preferences
2. Seasonal changes
3. Expectation of future prices
4. Income changes
5. Price of related goods (substitutes AND complements AND DERIVED DEMAND)
6. Demographic
7. Government policy (taxes/subsidies)
8. Interest and FX rates

Question 6

Define PED

PED values <1, >1

Answer 6

Measure of the degree of responsiveness of the quantity demanded of a good to a change in its price, CETERIS PARIBUS

<1: inelastic
>1: elastic

Question 7

Non price determinant of DEMAND (4)

Answer 7

1. Number and closeness of substitutes
2. Proportion of income spent
3. Habituality of consumption
4. Time horizon

Question 8

Price and non price application of PED:

1. If PED is inelastic (<1)
2. If PED is elastic (>1)

Answer 8

1. Inelastic: raise prices — firm produces less at a higher price - total revenue increases, total costs decrease -> profits rise
2. Elastic PED: lower prices to increase total revenue
   - profits may not increase as dependent on total cost (may increase due to higher production)
   - consider PRODUCT DIFFERENTIATION to reduce substitutability

Question 9

Define YED

1. YED<0
2. YED >0, <1
3. YED >0, >1

Magnitude of shift in demand curve when y increases

Answer 9

Measure of degree of responsiveness of quantity demanded to a change in consumer income, Ceteris Paribus

1. Inferior good (inversely proportional)
2. Necessity:
   - less than prop increase in demand
   - small rightward shift
3. Luxury;
   - more than prop increased in demand
   - large rightward shit

Question 10

Why is the degree of necessity of goods subjective

Answer 10

1. Depends on consumers base’s level of income
2. Depends on stage of economic development of country

Question 11

Applications of YED

Answer 11

1. Change in demand - extent
2. Change in income
3. Segmentation of consumer base
4. Government policy decisions

Question 12

Define CED

State the formula of CED

Answer 12

Measure of the degree of responsiveness of the quantity demanded of a good to a change in price of another good

% Change in Qd of A / % Change in price of B

Question 13

CED < 0

Answer 13

Complement

Rise in price of B leads to an increase in demand for A (more/less than prop decrease - strong/weak)

Question 14

CED > 0

Answer 14

Substitute

Rise in price of good B leads to a decrease in demand for good A (more or less prop decrease)

Question 15

Define supply

Define the law of supply

Answer 15

Amount that producers are willing and able to offer for a given price and in a given period of time

Qs is directly proportional to price, Ceteris Paribus.

Question 16

What determines the

1. Individual supply curve
2. Market supply curve

Answer 16

1. LDMR - makes the supply curve a parabola due to smaller increases in output given increase in FOP
2. Horizontal summation of all firm’s supply curves

Question 17

Determinants of supply (7)

Answer 17

1. Cost of production (price of FOPs)
2. Innovation/technology
3. Natural factors
4. Number of firms
5. Government policies (indirect tax vs indirect subsidy)
6. Price of related goods
   
   • joint supply (derived from same product)
   • competitive supply (competes for the same resources - CELL)
7. Expectation of future prices