Demand and Supply

Question 1

Define demand.

Answer 1

The quantity of goods that consumers wish to buy at any conceivable price.

Question 2

What drives demand?

Answer 2

Ability and willingness to pay.

Can one afford the good? Does one still want to pay for the good at that price?

Question 3

Draw a demand curve. Describe what happens to the quantity demanded of X if price increases. Explain why.

Answer 3

As price decreases, the quantity demanded increases.
When price increases, individuals will be able to afford less and they will switch to cheaper alternatives.

Or vice versa

Question 4

6 factors

What factors may determine demand?

Answer 4

1. Price
2. Income
3. Price of substitute goods
4. Price of complementary goods
5. Distribution of income
6. Tastes

Question 5

Describe a normal good and an inferior good. Show this on a demand curve. What is this called?

Answer 5

Normal good: When income increases, quantity demanded increases and the curve shifts right (Blue).
Inferior good: When income increases, quantity demanded decreases and the curve shifts left (Purple).
This is called the income effect.

Question 6

Define supply.

Answer 6

The quantity of goods that firms are willing to produce and sell at any conceivable price.

Question 7

What drives supply?

Answer 7

Profit maximisation of firms.

Question 8

Draw a supply curve. Describe what happens to the quantity supplied of X if price increases.

Answer 8

If price increases, the quantity supplied of X increases.

Question 9

5 factors

What influences supply?

Answer 9

1. Input prices
2. Available technology
3. Output price
4. Organisational changes
5. Government regulation

Question 10

Describe the substitution effect.

Answer 10

When the price of a good increases, individuals will switch to cheaper alternatives.

Question 11

Why does supply increase as price increases?

Answer 11

1. Producing higher quantites of a good requires greater input costs, so firms require a higher price to make staying in the market worthwhile.
2. The higher a price of a good, the more profitable it will be.
3. If a price remains high, more firms will decide to enter the market.

Question 12

What is a market?

Answer 12

The arrangement between buyers and sellers to exchange goods

Question 13

Draw a demand and a supply function. Show prices where the market has:
A) Surplus
B) Shortage

Answer 13

Question 14

Why does the market shift towards equilibrium?

Answer 14

Equilibrium maximises consumer and producer benefit as there is no surplus and no shortage. Consumer surplus and producer surplus is maximised.

Question 15

What is consumer/producer surplus?

Answer 15

The difference between what an consumer/producer would have been willing to buy/sell and the actual price. It is a measure of welfare.