Demand ( 3 )

Question 1

What is consumer surplus?

Answer 1

• The difference between the price the consumer is willing and able to pay, and the price they actually pay.
• Based upon what the consumer perceives their private benefit will be consuming the good.

Question 2

What is the consumer surplus on a graph?

Answer 2

The area above market price, and below the demand curve.

Question 3

How does the law of diminishing marginal utility affect consumer surplus?

Answer 3

• Consumer surplus generally declines with extra units consumed.
• This is because the extra unit generates less utility than the one already consumed, therefore consumers are willing to pay less for extra units.

Question 4

How does inelastic demand affect consumer surplus?

Answer 4

• An inelastic demand will give a larger surplus.

* Consumers are willing to pay a much higher price to consume the good.

Question 5

What is supply?

Answer 5

Supply is the quantity of a good or service that producers supply to the market at a given price, at a particular time.

Question 6

What does the supply curve show?

Answer 6

• The relationship between price and quantity supplied.
• At a given point along the curve it shows the quantity supplied. At any given point along the curve it shows the quantity of the good or service that would be supplied/

Question 7

What does the slope of the supply curve show?

Answer 7

Supply curves slope upwards, the higher the price charged for a good the higher the quantity supplied.

Question 8

Why does quantity supplied increase with price?

Answer 8

• Producers and sellers aim to maximise their profits.
• The higher the price for a good or a service, the higher the profit.
• Higher profit provides an incentive to expand production and increase supply, which explains why the quantity supplied of a good/service increases as price increases.

Question 9

When will firms produce?

Answer 9

Firms will only produce more if the price increases by more than costs.

Question 10

What is individual supply?

Answer 10

Supply that a producer is willing and able to sell at a given price in a given period of time

Question 11

What is market supply?

Answer 11

Sum of all individual supplies in a makret

Question 12

When will a supply curve shift?

Answer 12

When there is a decrease/increase at the amount supply at every price.

Question 13

What is joint supply?

Answer 13

• Increasing the supply of one good causes an increase or decrease in the supply of another good.
• Production of one good or service involves the production of another.
e.g. more lamb will increase the supply of wool.

Question 14

How does joint supply affect supply?

Answer 14

• If the price of a product increases, the supply of it and any other joint products will also increase.
• For example if the price of petrol increases, the level of drilling for oil will rise and the supply of petrol and its joint products will increase.

Question 15

What is composite supply?

Answer 15

Occurs when a good or service can be obtained from different sources, for example light can be supplied from candles, electricity or gas.

Question 16

What is competitive supply?

Answer 16

• Demand for a product can be satisfied by the supply of two or more goods that are substitutes for each other.
E.g. tea and coffee.
• Price of one good increases, the demand for the substitute good increases, because consumers will switch to the option that now appears relatively cheap in comparison.
• Two goods were the perfect substitutes of each other.

Question 17

Why are supply curves upwards sloping?

Answer 17

• If the price increases, it is more profitable for firms to supply the good, and so supply increases.
• High prices encourage new firms to enter the market, because it seems profitable, so supply increases
• With larger outputs, firms costs increase, so they need to charge a higher price to cover cost.

Question 18

What factors will shift the supply curve?

Answer 18

PINTSWC:
• Productivity
• Indirect Taxes
• Number of firms
• Technology
• Subsidies
• Weather
• Cost of production

Question 19

How does productivity affect supply?

Answer 19

Higher productivity causes a shift to the right, because average costs for the firm fall.

Question 20

How do indirect taxes affect supply?

Answer 20

Decrease, causes an inwards shift in supply.

Question 21

How does costs of production affect supply?

Answer 21

If the cost of production fall, the firm can afford to supply more, if costs rise, there will be a shift to the left.

Question 22

How does exchange rate affect cost of production?

Answer 22

Decrease in exchange rate, weak pound.

Cost of imports rise, which will shift supply to the left.

Question 23

How does weather affect supply?

Answer 23

Favourable conditions cause an outwards shift in supply

Question 24

How does technology affect supply?

Answer 24

Decrease costs of production, increase supply.

Question 25

How does number of firms affect supply?

Answer 25

Shifts to the right, more firms are able to supply, shifting to the right.

Question 26

How does the cost of other goods affect supply?

Answer 26

If the price of one product increases, the firms may switch production from a less profitable one to increase production of higher price product, decreasing supply of lower price product.

Question 27

How does a subsidy affect production?

Answer 27

Decreases costs, increases supply.