Demand and Supply

Question 1

describe the flow for DD/SS explanations

Answer 1

1. Trigger (willingness/ ability)
2. shift in DD/SS curve
3. Diagram
4. Market adjustment process
5. Outcome (P, Q, TR/TE)

Question 2

Factors that affect DD

(EGYPT-A)

Answer 2

1. Expectations of future price changes
2. government policies
3. Income
4. Price of related goods (complementary/substitutes)
5. Taste and preference

Question 3

Factors that affect SS

PERMS

Answer 3

1. Price/production of related goods (complementary/ substitutes)
2. Expectations of future price rise
3. Random shocks or natural disasters
4. Marginal cost of production
5. Sellers

Question 4

Elasticities recap

define, what does it affect, when to use

Answer 4

YED
- definition: responsiveness of demand to a change in income, ceteris paribus
- affects: direction and extent of curve shift
- used when income is the trigger

XED
- definition: responsiveness of demand of good A to a change in price of good B
- affects: direction and extent of curve shift
- used when price of related goods is the trigger

PED/PES
- Responsiveness of quantity demanded/supplied to a change in price of the good, cp
- affects: Extent of P/Q change (movement along the DD/SS curve)
- examine extent of P/Q shift

PES does not change TR when demand shifts

Question 5

Factors affecting YED

Answer 5

Degree of necessity
- YED < 0, inferior
- 0 < YED < 1, normal necessity good
- YED >1, normal luxury good
perception based on consumers income level

Question 6

Factors affecting XED

Answer 6

Relationship
- XED < 0, complements
- XED > 0, substitutes
Closeness of relationship determines magnitude

Question 7

Factors affecting PED

note: PED is always negative hence |PED| is taken

Answer 7

• number and closeness of subtitutes
• proportion of income spent on the good
• time period (to find suitable substitutes)

Question 8

Factors affecting PES

in general, its about ease of adjusting output

Answer 8

• Time period
• availability of spare capacity/ unsold spare stocks
• ability to switch FOP for production of other goods

Question 9

How to determine if DD or SS shifts more?

Answer 9

Depends on trigger
1. income change: use YED
2. price of related goods: use XED
3. if trigger is not either use preamble/logic to reason which one shifts more

Question 10

explain the price adjustment process

Answer 10

shortage
- Qd > Qs at initial price
- frustrated consumers bid up the price resulting in an upward pressure on price
- As price rises, Qd falls and Qs rises until new equlibrium where Qd = Qs

surplus
- Qd <Qs
- sellers lower price to clear excess stock resulting in a downward pressure on price
- As price rises, Qd rises and Qs falls until new equilibrium is reached where Qd = Qs

Question 11

If P and Q change in different directions (one rises and one falls), what has to be done?

Answer 11

1. hold SS curve and shift DD curve to analyse TR
2. hold DD constant, shift SS curve to analyse TR (PED required)

Question 12

evaluation points to consider (for discuss questions)

3 points

Answer 12

1. Long term versus short term
2. sub-markets
3. Ceteris paribus doesn’t hold

Suggests that DD/SS shift is different or elasticities are different