Demand and Supply - Week 1/ Chp 3,6,7

Question 1

What is demand curve?

Answer 1

The demand curve for a product shows the quantity that customers are willing and able to buy at each and every price, all other things being unchanged over a given time period.

Question 2

What factors affect demand?

Answer 2

1. Price level
2. The customers’ incomes
3. The price of competitors’s products (substitute products)
4. The price of complementary products
5. The number of customers in the market

Question 3

How do price levels affect demand?

Answer 3

• As the price changes, this influences the relative value of the product compared with other goods and services, and the amount that customers want and are able to buy.

Question 4

How does customer income affect demand?

Answer 4

• This influences what customers can afford. If the economy is booming, for example, and people are earning more, this might lead to more spending on many goods and services as more can be bought at each and every price in a given time period.

Question 5

How do substitute products affect demand?

Answer 5

• A change in the price of Company X , for example, may affect the sale of Company Y.

Question 6

How do complementary products affect demand?

Answer 6

For example, an increase in the price of Sony Playstation consoles may affect sales of Playstation computer games.

Question 7

What is the law of diminishing marginal utility?

Answer 7

• This law states that, as buyers consume additional units of a product, the extra satisfaction (or utility) that they gain from each unit will fall.

Question 7

How does the number of customers in a market affect demand?

Answer 7

• For example, a product may be aimed at a new market segment (such as a new country or a new group of buyers), which can boost the quantity demanded at any price.

Question 8

What is marginal Utility?

Answer 8

measures the extra utility (or satisfaction) from consuming an additional unit of a product.

Question 9

What is total utility?

Answer 9

is the total satisfaction from the consumption of a product.

Question 10

What is the paradox of value?

Answer 10

• In the case of water, there is a relatively large amount of water available and consumed in the world.
• This means that, although the total utility from consuming water is high, the extra utility is low and therefore people will not pay much for an additional unit of this, even though it is essential to survival.
• In the case of diamonds, the availability and the amount of consumption is much lower, meaning the marginal utility is high (although total utility is not, compared with water); people will pay a lot for another diamond even though it is not essential to survival.

Question 11

What is the substitution effect?

Answer 11

• occurs when consumers switch towards a relatively cheaper product.
• If the price of a product falls, we assume that consumers always switch towards it, because it is relatively cheaper than alternatives, and so the substitution effect increases the quantity demanded.

Question 12

What income effect?

Answer 12

• occurs because, if a good is cheaper, consumers can purchase more products with the same nominal income.
• Their money can buy more, which means that their real income has increased (i.e they have more purchasing power).
• In the case of most goods, having more real income increases the quantity demanded.

Question 13

What is a Giffen good?

Answer 13

• This is a very basic product that is essential to survival in a poor economy, such as rice in a developing country.
• When the price of this type of product rises, consumers find that they are spending so much on it (because it is essential to survival and one of the few things that they can afford to eat) that they have very little left over for anything else.

Question 14

What is a veblen good?

Answer 14

• Customers believe that the higher price of the product reflects a better quality or has a better image, and therefore want more even though it is more expensive.

Question 15

With Giffen goods what does a fall of price mean?

Answer 15

• consumers want to substitute towards this product, so, as always, this substitution effect increases the quantity demanded; and
• an increase in real income due to the lower price leads to a fall in quantity demanded as consumers switch to more luxurious goods. This is the income effect reducing the quantity demanded.

Question 16

What occurs when a movement along a demand curve?

Answer 16

-occurs when the price changes and all other things remain unchanged in a given time period.
- A shift in demand occurs if these other factors do change.
- The demand curve for a product will shift if at each and every price customers are willing and able to buy more or less than they did before in a given time period

Question 17

What is joint demand?

Answer 17

• Joint demand occurs when there is more than one reason why a product is demanded. A change in demand conditions may therefore come from different sectors.

Question 18

What is derived demand?

Answer 18

• Derived demand is demand that comes from (is derived) from the demand for something else.
• Thus, the demand for machinery is derived from the demand for consumer goods that the machinery can make.
• If there is low demand for consumer goods, there is low demand for the machinery that can make them.
• Demand for bricks is derived from spending on new construction projects.

Question 19

What is market demand?

Answer 19

is the sum of all of the individual demand curves.

Question 20

What are reasons for a shift in demand?

Answer 20

• A change in income
• A change in marketing strategies
• A change in the number of buyers
• A change in the price of substitute products
• A change in the price of complements
• Weather
• Events
• Change in social Patterns

Question 21

What is the supply curve?

Answer 21

The supply curve of a product shows the amount that producers are willing and able to produce at each and every price in a given time period, all others things being unchanged.

Question 22

What is an extension of supply?

Answer 22

when the quantity of a commodity supplied increases due to a rise in its price

Question 23

What is a contraction of supply?

Answer 23

a decrease in the quantity of a commodity supplied due to a decrease in its price, while other factors remain unchanged.

Question 24

What is the reason for a shift in the supply curve?

Answer 24

• A change in the number of producers
• A Change in technology
• A change in costs
• A change in indirect taxes
• A change in weather conditions

Question 25

What is the industry supply curve?

Answer 25

is the total quantity supplied by all the firms in the industry at each and every price.

Question 26

What is joint supply?

Answer 26

• an economic concept that describes when the production of one or more products is a result of a common resource or input.

Question 27

What is a market?

Answer 27

occurs when buyers and sellers interact to exchange goods and services

Question 28

What is equilibrium?

Answer 28

Equilibrium occurs in a market when, at the given price, the quantity supplied equals the quantity demanded and there is no incentive for this position to change.

Question 29

How is equilibrium achieved in a free market?

Answer 29

• In a free market, the equilibrium output is reached by changes in the price.
• The decisions of producers and customers are made independently of each other; the price mechanism acts to bring these decisions together, and to equate the quantity supplied and demanded. - As demand or supply conditions change the price will adjust to bring about a new equilibrium price and quantity.

Question 30

How does price affect the decisions of producers and consumers in a free market?

Answer 30

• An incentive
• As a signal
• As a rationing device

Question 31

How does price as a incentive affect the decisions of producers and consumers in a free market?

Answer 31

a higher price is an incentive for existing producers to increase output. With a higher price producers can cover higher costs and produce more.

Question 32

How does a price as a signal affect the decisions of producers and consumers in a free market?

Answer 32

• If the price rises, for example, this acts as a signal to other producers that this is an industry that they might want to enter to earn high profits.
• The high price acts as an incentive for firms to enter into this industry because of the potential rewards.
• This can be seen when a new business idea proves to be successful: within months, the idea is likely to be copied as others enter the industry.

Question 33

How does a price as a rationing device affect the decisions of producers and consumers in a free market?

Answer 33

• If the price increases, it reduces the quantity demanded until it equals the quantity supplied.
• This can be seen at an auction, where the price keeps rising until only one person can afford the product for sale.

Question 34

Why can demand increase if a market is originally at equilibrium?

Answer 34

• there are more buyers in the market;
• the industry has marketed its products more effectively;
• income has increased (assuming that it is a normal good);
• the price of a complement has fallen; or
• the price of a substitute has increased.

Question 35

What does the size of the effect on price and quantity depend on?

Answer 35

• how much the demand curve shifts; this may depend on factors such as the size of the income elasticity of demand and the size of the cross-price elasticity of demand
• the price elasticity of supply. The more price inelastic supply is, for example, the more that price will change relative to output.
• If, however, supply is relatively price elastic, then the effect will mainly be on output rather than price.

Question 36

What is indirect tax?

Answer 36

• An indirect tax, such as value added tax (VAT), is one that is a charge placed on the provider of a good or service.
• The producer is legally obliged to pay this tax to the government; it has the effect of increasing costs.
• However, the producer will try to pass this tax on to the customers and make them pay for it.
• The ability of the producer to do this depends on the price elasticity of demand for the product compared to the price elasticity of supply.

Question 37

What are subsidies?

Answer 37

• Subsidies may be paid by a government to producers of particular products to reduce their costs of production.
• This may be to support a developing industry, to create jobs, or to protect domestic firms against foreign competition.
• A production subsidy will mean that producers are willing and able to produce any given output at a lower price

Question 38

What are interrelated Markets?

Answer 38

-an economy is a collection of millions of different markets. Many markets are therefore interrelated, meaning that changes in one market will impact on others