DEMAND AND SUPPLY

Question 1

Demand Curve

Answer 1

Total volume of a product that buyers are willing and able to buy at a particular price. LAW OF DEMAND: As price falls, quantity of demand will increase Price falls-> Extension of Demand Price Increase -> Contraction of Demand Changes in demand caused by change in price are movements along the demand curve

Question 2

CONDITIONS OF DEMAND

Answer 2

Price: price of good Household Income: Size of household income Substitute Goods: price of other substitute goods Tastes: Taste and Fashion Expectation: Expectation of future price changes

Question 3

DEMAND AND INCOME

Answer 3

Normal Goods: Rise in household income, increase in demand Inferior Goods: Rise in household income, fall in demand Substitute Goods: Alternative goods, rise in one leads to decrease in other Complement Goods: Goods bought together, demand increase in one leads to demand increase in other Fashionable Goods: Demand increase without change in price - could be due to advertising

Question 4

SHIFT IN DEMAND CURVE Quantity demand will change even if price remains constant Variations in condition of demand create shifts in the demand curve

Answer 4

1. Rise in household income (reduction in tax) 2. A rise in price of substitutes

 3. A fall in price of complements

 4. A change in taste towards product

 5. An expected rise in price of product

 6. An increase in population


Question 5

SUPPLY CURVE Quantity of good that suppliers are willing and able to produce for the market at a given price

Answer 5

Willing to Supply: Price is high enough to provide a profit Able to Supply: Firm has resources to supply product At a given price: Firms incentivized to produce product by prospect of higher profits from higher priced goods

Question 6

LAW OF SUPPLY As prices rise, quantity supplied of the good will increase FACTORS INFLUENCING SUPPLY QUANTITY

Answer 6

1. Cost of making the good: raw material costs, wages, interest rate 2. Price of other goods: Suppliers switching to more profitable goods

 3. Expectation of price change: Suppliers will produce less when price is low and increase supply if they anticipate higher price

 4. Changes in Technology: Enable increased supply @ same price

 5. Other factors: Weather in agriculture


Question 7

SHIFT IN SUPPLY CURVE Rightward (Downward) shift represents expansion Leftward (Upward) shift represents contraction

Answer 7

EXPANSION CAUSED BY 1. A fall in cost of production 2. A fall in price of other goods

 3. Technology reducing unit cost and increasing production

 4. Don’t don’t Increased efficiency in production reducing costs

 CONTRACTION CAUSED BY 1. Increase in cost of production 2. A rise in prices of other goods suppliers may switch too

 3. Increase in indirect taxes or a reduction in taxes


Question 8

Price Mechanism?

Market Clearing Price?

Answer 8

Brings demand and supply into equilibrium

Price at which there is no surplus or shortage in market

Shift in supply curve or demand curve will change equilibrium price

Question 9

3 Functions of the Price Mechanism

Signal

Ration

Reward

Answer 9

Signal shortages or surpluses

Ration scarce supply amongst potential buyers

Reward firms and household for alleviating shortages or surpluses

Question 10

Short Run

Transition

Long Run

Answer 10

In short run supply and demand are relatively unresponsive due to logistics and consumer behavior

Some exceptions include the stock market

Question 11

Elasticity?

Price Elasticity of Demand (PED)?

Arc Elasticity of Demand?

Answer 11

Realationship btwn change in quantity and change in price

Extent of change in market demand for good in response to change in price

Arc elasticity formula uses averages

Question 12

Inelastic (Basic food stuff, Medicine)

Elastic (Holidays, luxury cars)

Answer 12

Demand is inelastic if absolute values in less than 1

Demand is elastic is absolute value is greater than 1

On Demand Curve at higher prices demand is elastic

On Demand Curve at lower prices demand is inelastic

Vertical Straight line = Demand is perfectly inelastic

Horizontal Straight line = Demand is perfectly elastic

Rectangular hyperbola = Unit elasticity

Question 13

Factors influencing Price Elasticity

Answer 13

Percentage of Income spent on good -Small proportion of income -> inelastive

Availability of substitutes -More substitutes ->elastic

Degree of necessit -Necessary -> inelastic

Time Horizon -Longer ->elastic

Habitual Purchsing - Cigarettes ->inelastic

Question 14

Price Elasticity of Supply

Answer 14

Measure responsiveness of the quantity good supplied after change in price

EoS = (%change in Quantity supplied) / (%change in price)

Supply is fixed ->Perfecly Inelastic ->Vertical Line

Supply varies proportionally with price-> Straight line passing through the origin

Supply any amount at a given price ->Perfectly elastic-> Horizontal Line

Question 15

Factors nfluencing Price Elasticity of Supply

Answer 15

Existence of inventories of finished goods ->elastic

Availability of labor

Spare capacity

Availability of raw materials and components

Barriers to entry

Time scale

Question 16

Momentary (Market Period)

Short run

Long run

Answer 16

Momentary - Limited to existing inventories ->Supply is fixed

Short run - Can produce more if not running at full capacity

Long run -Firms can alter fixed equipment. New firms enter industry

Supply tends to be more elastic in longer time periods