demand and supply

Question 1

what are supply and demand?

Answer 1

• forces that make market economies work
• determine the quantity of each good produced and the price at which it is sold
• before implementing an event or policy, you must first think about how it will impact demand and supply
• supply and demand refer to behaviour of people as they interact with one another in markets

Question 2

what is a market?

Answer 2

groups of buyers and sellers of a particular good or service

Question 3

what is a competitive market?

Answer 3

a market in which there are many buyers and sellers so that each has a negligible impact on the market price.
e.g. competitive market for milk - each producer has limited control over price because other sellers are offering almost identical milk

e.g. non-competitive market: netflix, hulu, amazon for online streaming
small number of providers -> each provider is big enough to affect market price

Question 4

what are perfectly competitive markets?

Answer 4

1. goods being offered for sale are identical for all sellers
2. buyers or sellers are so numerous that no single buyer or seller can influence the market price (they are”price takers”)

Question 5

what is individual/market demand?

Answer 5

people have unlimited needs/wants for goods and services
demand reflects a decision about which needs/wishes to satisfy

individual demand is the amount of a good that an individual is willing and able to purchase within a give time period

market demand is the amount of a good that all buyers are willing and able to buy within a given period of time

Question 6

what are the factors affecting individual demand

Answer 6

price
income
price of related goods
tastes
expectations
advertising

Question 7

what is the law of demand

Answer 7

other things being equal, the quantity demanded of a good falls when the price of a good rises = quantity demanded is negatively related to the price

Question 8

how does income affect individual demand?

Answer 8

if the demand for a good increases when income increases, the good is called a normal good e.g. pizza

If the demand for a good falls when income increases, the good is called an inferior good e.g. frozen pizza

Question 9

how does the price of related goods affect individual demand?

Answer 9

substitutes: two goods for which an increase in the price of one good leads to an increase in demand for the other e.g. pizza and pasta

complements: two goods for which an increase in the price for one good leads to a decrease in the demand for the other good
e.g. pizza and beer

Question 10

how do tastes affect individual demand?

Answer 10

if you like something, you buy more of it

Question 11

how do expectations affect individual demand?

Answer 11

if you expect to earn a higher income next month, you may save less this month and buy more pizza.

if you expect the price of pizza to be lower next week, you may be less willing to buy a pizza at today’s price

Question 12

how does advertising affect individual demand?

Answer 12

if a firm is having an advertising campaign, the demand for the product will rise

Question 13

what is a demand schedule?

Answer 13

table that shows the relationship between the price of a good and the quantity demanded, when all other variables affecting demand are held constant

demand curve: graph of the relationship between the price of the good and the quantity demanded, when all other variables affecting demand are held constant

Question 14

what affects market demand?

Answer 14

• factors which affect individual demand
• number of buyers

market demand is found by adding horizontally the individual demand curves

Question 15

what are demand changes?

Answer 15

when the price changes, Qd changes, this is a movement along a demand curve

when a non-price determinant changes, the demand schedule/curve changes, this is a shift of the demand curve

Question 16

what is supply?

Answer 16

the quantity supplied of any good or service is the amount that sellers are willing and able to sell at a given price in a given period of time?

Question 17

what is individual supply?

Answer 17

the amount that one particular firm is willing and able to sell

Question 18

what determines individual supply?

Answer 18

• price of the good
• input prices
• technology
• expectations
• natural/social factors
• profitability of other goods in production and prices of goods in joint supply

Question 19

what is the law of supply?

Answer 19

other things being equal, the quantity supplied of a good rises when the price of a good rises

Question 20

how do input prices affect individual supply?

Answer 20

when the price of one or more inputs rises, producing pizza becomes less profitable so the firm should produce less pizzas

the quantity supplied of a good is negatively related to the price of inputs used to make that good

Question 21

how does technology affect individual supply?

Answer 21

an advancement in technology that reduces firms’ cost (e.g. less workers needed to produce same number of pizzas) will make producing pizzas more profitable and thus raise the quantity of pizza supplied.

Question 22

how do expectations affect individual supply?

Answer 22

if the firm expects the price of pizza to increase in the future, it will put some of its current production into storage and supply less to the market today

Question 23

how do natural/social factors individual supply?

Answer 23

• flood or drought reduces agricultural production
• impact covid-crisis on cinemas

Question 24

how do the profitability of other goods in production and prices of goods in joint supply affect individual supply?

Answer 24

firms have some flexibility in their supply and can sometimes switch production to other goods that might be more profitable

sometimes goods are in joint supply e.g. lamb and wool
an increase in the supply of lamb will also lead to an increase in the supply of wool

Question 25

what is the supply schedule?

Answer 25

a table showing the relationship between the price of the good and the quantity supplied when all other variables affecting supply are held constant

Question 26

what is a supply curve?

Answer 26

graph of the relationship between the price of a good and the quantity supplied when all other variables affecting supply are held constant

Question 27

what is market supply?

Answer 27

• sum of all individual supplies for a particular good or service
• found by adding horizontally the individual supply curves
• it shows the total quantity supplied of a good varies as the price of the good varies

Question 28

what does market supply depend on:

Answer 28

factors affecting individual supply and number of sellers

Question 29

what are supply changes

Answer 29

when the price changes, the quantity supplied changes, this is a movement along the supply curve

when a non-price determinant changes, supply changes, this is a shift of the supply curve.