Demand, Supply and Equilbrium

Question 1

Define ‘demand’.

Answer 1

The willingness and ability to buy a good or service at a given price

Question 2

What are the 2 ‘Golden Rules’ of demand?

Answer 2

Any movement along the demand curve is price-related

Everything non-price related causes a shift

Question 3

What are the 7 factors affecting demand?

Answer 3

Population
Advertising
Substitutes
Income
Fashion/trend/preference
Interest rates
Complements

Question 4

How does population affect demand?

Answer 4

Direct relationship - as population increases, so does the demand for goods and services

Question 5

How does advertising affect demand?

Answer 5

It increases customer awareness, therefore increasing demand for the good/service

Question 6

How do substitutes affect demand?

Answer 6

If the price of a good increases, its demand decreases as its substitutes will be cheaper.

Question 7

What are normal goods?

Answer 7

Goods for which demand will increase if income increases (eg. luxury goods)

Question 8

What are inferior goods?

Answer 8

Goods for which demand will increase if income decreases

Question 9

How does income affect demand?

Answer 9

Normal goods - Direct relationship

Inferior goods - Inverse relationship

Question 10

How does fashion/trends/preference affect demand?

Answer 10

If a good/service is fashionable, demand for it will increase.

Question 11

How do interest rates affect demand?

Answer 11

Inverse relationship - as they increase, demand for goods/services decreases

Question 12

How do complements affect demand?

Answer 12

When the demand of a good increases, so does the demand of its complementary good.

Question 13

What is a substitute good?

Answer 13

A good bought as an alternative to another but performs the same function

Question 14

What are complementary goods?

Answer 14

Goods purchased together as they are consumed together

Question 15

Define ‘supply’.

Answer 15

The willingness and ability of producers to sell a good/service at a given price

Question 16

What are the two ‘Golden Rules’ of supply?

Answer 16

Any movement along the supply curve is price-related.

Everything else causes a shift.

Question 17

Name the seven factors affecting supply.

Answer 17

Productivity
Indirect tax
No. of firms
Technology
Subsidies
Weather
Cost of production

Question 18

How does productivity affect supply?

Answer 18

Direct relationship - as it increases, so does supply

Question 19

How does indirect tax affect supply?

Answer 19

Inverse relationship - indirect taxes increase costs of production, therefore reducing supply

Question 20

How does the number of firms affect supply?

Answer 20

The more firms there are, the more supply is created

Question 21

How does technology affect supply?

Answer 21

New technology can increase efficiency and reduce cost of production, therefore increasing supply

Question 22

How do subsidies affect supply?

Answer 22

Subsidies reduce costs of production therefore increasing supply

Question 23

How does weather affect supply?

Answer 23

Good weather can improve crop yields, increasing supply but bad weather can decrease supply

Question 24

How does the cost of production affect supply?

Answer 24

If production costs rise, firms will reduce supply as their profits will be reduced

Question 25

What are subsidies?

Answer 25

Money payments given by the government to firms to reduce their cost of production and prices of goods/services

Question 26

What is an indirect tax?

Answer 26

Taxes levied on spending (eg. VAT)

Question 27

What is market equilibrium?

Answer 27

The price at which the market clears (no shortages or surpluses)

Question 28

How does an increase in demand affect the equilibrium price and quantity?

Answer 28

The equilibrium price and quantity both increase.

Question 29

How does a decrease in demand affect the equilibrium price and quantity?

Answer 29

The equilibrium price and quantity both decrease.

Question 30

How does an increase in supply affect the equilibrium price and quantity?

Answer 30

The equilibrium price decreases but the quantity increases.

Question 31

How does a decrease in supply affect the equilibrium price and quantity?

Answer 31

The equilibrium price increases but the quantity decreases.