Demand and Supply

Question 1

Define demand

Answer 1

Demand is the amount of a good that a consumer is willing and able to buy at a given price over a given period of time

Question 2

Describe the relationship between quantity demanded and price

Answer 2

Quantity demanded and price have a negative relationship. When one increases, the other decreases

Question 3

How does the demand curve look

Answer 3

The demand curve is a downwards sloping curve, indicating the negative relationship between price and quantity demanded

Question 4

What happens when the price of a good increases

Answer 4

When the price of a good increases, there is a contraction of demand

Question 5

What happens when the price of a good decreases

Answer 5

When the price of a good decreases, there is an extension of demand

Question 6

Name the factors that might cause a shift of the demand curve

Answer 6

Changes in income
Change in price of a substitute good
Change in price of a complementary good
Advertising
Changes in population size and structure
Taxes
Changes in tastes
Interest rates
Speculation

Question 7

How do changes in income affect demand

Answer 7

As income rises, people have more disposable income and they thus can afford to buy more goods. This leads to an increase in demand as more people are willing and able to buy goods

Question 8

How do changes in price of a substitute good affect demand

Answer 8

Substitute goods are goods in competitive demand, meaning that you only buy one or the other. When the price of a good increases and its demand falls, demand for its substitute good will increase. This is because these goods cannot be consumed together, and therefore when less people start buying the one, more will start buying the other

Question 9

How do changes in price of complementary goods affect demand

Answer 9

Complementary goods are goods in joint demand, meaning that we demand and buy them together. If the price of a good increases and demand for it falls, demand for its complementary good will fall as well. This is because the total cost of buying the two went up, so even if the price of one good stays the same, demand will fall since they are bought together

Question 10

How does advertising affect demand

Answer 10

Advertising creates a want for a good. Advertisers successfully make a good look appealing, encouraging consumers to buy it. Consumers become attracted to it and are interested in buying it, increasing demand

Question 11

How do changes in population size and structure affect demand

Answer 11

When the population of a country increases, there are more people there to buy a good. Thus, demand for goods tends to increase. Also, if the population of specific groups, like women or elderly people increase, then demand for goods made for them will increase as well

Question 12

How do taxes affect demand

Answer 12

Taxes such as income tax are taxes that take money from the income of consumers. Thus, if income tax increases consumers will have less disposable income and they will consequently be willing and able to buy less goods, causing demand to fall

Question 13

How do changes in tastes affect demand

Answer 13

When tastes change and a product becomes popular, more people start buying it, increasing demand

Question 14

How do interest rates affect demand

Answer 14

Interest rates are the cost of borrowing or the reward for saving money. If interest rates increase, consumers will have to return more money when taking a loan and will earn more money from saving. This encourages consumers to save their money instead of taking loans and spending, resulting in demand falling

Question 15

What are two reasons that might lead to an increase in demand

Answer 15

Changes in income, advertising

Question 16

What are two reasons that might lead to a decrease in demand

Answer 16

Changes in income, taxes

Question 17

Define supply

Answer 17

Supply is the amount of goods that producers are willing and able to sell at a given price over a given period of time

Question 18

Describe the relationship between quantity supplied and price

Answer 18

Quantity supplied and price have a positive relationship. When one increases, the other increases as well

Question 19

Name the factors that affect supply

Answer 19

Changes in costs of production
Technical progress
Change in price of goods in joint supply
Change in price of goods in competitive supply
Unfavorable weather condition
Indirect taxes
Subsidies
Number of firms
Productivity

Question 20

How do changes in costs of production affect supply

Answer 20

When costs of production increase, consumers make less profit from selling a good. They are thus willing to supply less at a given price, resulting in a fall in supply

Question 21

How does technical progress affect supply

Answer 21

Advancements in technology allow producers to use other methods that are more efficient in production. This leads to a fall in average production costs, allowing producers to supply more as they can make more profits. Therefore, supply increases

Question 22

What is the market equilibrium

Answer 22

Market equilibrium is the price where supply equals demand

Question 23

What happens when demand for a good exceeds supply

Answer 23

When demand for a good exceeds supply, a shortage develops. This will lead to an increase in its price

Question 24

What happens when supply for a good exceeds demand

Answer 24

When supply for a good exceeds demand, there will be a surplus, resulting in a fall in price

Question 25

Give an example of complementary goods

Answer 25

Televisions and television remotes

Question 26

Give an example of substitute goods

Answer 26

Samsung and iPhone

Question 27

Give an example of goods in derived demand

Answer 27

Tables and wood

Question 28

What is the price mechanism

Answer 28

Price mechanism are the forces of demand and supply that determine price and allocation resources

Question 29

What are the three functions of the price mechanism

Answer 29

The signalling function
Incentive
The rationing function

Question 30

What is the signalling function

Answer 30

The signalling function signals producers through an increase in price that demand is high and that they should increase production

Question 31

What is the incentive function

Answer 31

When prices are high, producers are attracted to the market as it can enable them higher profits

Question 32

What is the rationing function

Answer 32

Due to the fact that resources are scarce, when demand is greater than supply prices are bid up so that the good is rationed out only to those who can afford to pay

Question 33

What is the dependency ratio and what is its formula

Answer 33

The dependency ratio is the ratio that compares the number of people at work with the total population of a country

dependency ratio: total population / number of people at work

Question 34

What are the effects of a change in the size of a population

Answer 34

Firms: Increased demand for products, Increased availability of workers

Government: Government gets more revenue from taxes, Government needs to provide more public goods like hospitals and schools

Economy: Increased economic growth, Prices of all goods and services increase

Question 35

What are the effects of a change in the age of a population

Answer 35

Firms: If population is ageing, firms will sell goods for the elderly, More workers available for jobs that require experience

Government: Increased dependency so government spending increases (pensions)

Economy: Productivity in sectors that require young people falls if population is ageing

Question 36

What are the effects of a change in the age of a population

Answer 36

Firms: If population is ageing, firms will sell goods for the elderly, More workers available for jobs that require experience

Government: Increased dependency so government spending increases (pensions)

Economy: Productivity in sectors that require young people falls if population is ageing

Question 37

Define ageing population

Answer 37

An ageing population is the general increase in the average age of the population due to falling birth and death rates

Question 38

Why do developing countries have bigger birth rates

Answer 38

Labor intensive market
Bigger chance of children dying
Lack of contraception

Question 39

What are taxes

Answer 39

Taxes are compulsory charges set by the government on goods with the purpose of raising funds for government spending

Question 40

What is a direct tax

Answer 40

A direct tax is a tax paid directly on an individual or business (eg, income tax)

Question 41

What is an indirect tax

Answer 41

An indirect tax is a tax set on the expenditure of goods and services. It raises the price of a good and also the cost of production

Question 42

What is an ad valorem tax

Answer 42

An ad valorem tax is a tax charged as a percentage of the price of a good. It causes a pivotal rotation of the supply curve to the left