Demand and Supply

Question 1

Microeconomic non price determinants of demand

Answer 1

1. Real income
   - Normal good
   - Inferior good
2. Prices of other goods
   - Substitutes
   - Complements
   - Unrelated goods
3. Tastes and Preferences

Question 2

Larger non-price determinants of demand

Answer 2

1. Population size
2. Age structure of population
3. Income distribution - more ‘necessity goods’ demanded and fewer ‘high end luxury’ goods demanded
4. Government policy
5. Seasonal changes e.g. swimsuits in summer, hats in winter

Question 3

Describe ways government policy can determine demand.

Answer 3

• information provision,
• direct taxes(affect real DI) ,
• Indirect taxes and subsidies

Question 4

Meaning of demand

Answer 4

• The quantity of a good
• Which consumers are willing and able to buy
• At a given market price
• Within a given time period

Question 5

Meaning of supply

Answer 5

• Quantity of a good
• Which producers are willing and able to supply
• At a given market price (ceteris paribus)
• Within a given time period

Question 6

Why does the supply curve slope upwards

Answer 6

• At higher prices more output can be produced profitably.

- New producers are also attracted to the market?

Question 7

Non price determinants of supply

Answer 7

1. Production costs (costs of factors of production)
2. Price of alternative goods which the producer could make
3. State of technology
4. Expectations
5. Government interventions

Question 8

Why is the demand curve downward sloping

Answer 8

1. Income effect - people’s real incomes rise as price goes down
2. Substitution effect - as price goes down, holding prices of other goods constant, consumers likely to substitute this good in place of more expensive goods.

Question 9

Explain how price of alternative goods which producers could make affects supply.

Answer 9

• If price of good B goes up, then producer may allocate resources away from producing A and towards B.
• Movement along the supply curve of B as quantity supplied expands,
• But there needs to be a leftward shift of A’s supply since A’s price doesn’t change, but its quantity supplied will have to decrease due to the reallocation of some productive capacity towards producing B.

Question 10

Why are expectations a determinant of supply?

Answer 10

• Effect of expectations on production decisions vary
• Producers who expect higher demand and hence price may withhold supply from market to build inventories which they can release onto the market more profitably in the future.
• Alternatively, supply may shift outwards (increase) so producers can make more profit when there’s a higher price and demand.
• If market research suggests demand for a good will fall, then producers may reallocate its production away from the good, and reduce the supply of the good.

Question 11

Describe how government policies can be a determinant of supply.

Answer 11

• Indirect taxes

- Subsidies