Demand, Supply & The Market

Question 1

What is demand?

Answer 1

The quantity that buyers wish to buy at each price

Question 2

Why is the demand curve sloping downwards?

Answer 2

Because the relationship with the price and quantity demanded is negatively related
Price low -> Quantity demanded high
Price high -> Quantity demanded low

Question 3

What is the difference between demand and inverse demand?

Answer 3

The price of good x affects the quantity demanded for good x (price rises, consume less, price falls, consume more)
Mathematically, relationship between price of good x and x: X = A - P(x), where A: arbitrary constant, P(x): price of good x, cause, X: quantity demanded for x, resultant

Question 4

Demand equation

Answer 4

X = A - P(x)

Question 5

Inverse demand equation

Answer 5

P(x) = A - X
where
A: arbitrary constant
x: quantity demanded, cause
P(x): price of x, resultant

Question 6

What factors may cause the demand curve to shift parallel to the right/left?

Answer 6

Changes in:
1. Taste & preference of consumers
2. Price of other goods (depending on if they are gross substitutes or complements)
3. Consumers’ income
Parallel used to emphasize only the factors above may cause demand to shift, BUT shift of demand unaffected by price of good x itself

Question 7

What causes movement along the demand curve?

Answer 7

If price of good x changes -> changes in quantity demanded of good x

Question 8

What is a perfect substitute?

Answer 8

Goods that are equally the same
e.g. water in a cup and water in bottle, can’t tell the difference as water is colourless and tastes the same

Question 9

What is a gross substitute?

Answer 9

Goods that are completely different
e.g. coffee and tea, colour and taste are different

Question 10

What are complements?

Answer 10

Goods that are consumed together
e.g. bread with jam, coffee with sugar/creamer

Question 11

What is supply?

Answer 11

The quantity of a good that sellers wish to sell at each price

Question 12

Why does the supply curve slope upwards?

Answer 12

Because the relationship of price and supply are postively related, meaning assuming other things equal, the higher the price, the higher the quantity supplied because suppliers want to maximise profit

Question 13

What causes the supply curve to shift?

Answer 13

Changes in:
1. Technology -> furthers/stagnates production relative to supplier’s competitor(s)
2. Number of producers -> the more producers, the more supply and vice versa
3. Price of input factors (raw materials)
4. Weather (in the context of agricultural goods) e.g. rice

Question 14

Effect of increase in demand on the demand curve

Answer 14

Factor induces increase in demand -> shifts demand curve to the right -> increases equilibrium price and equilibrium quantity

Question 15

Effect of decrease in demand on the demand curve

Answer 15

Downward shift of demand curve -> reduces equilibrium price and equilibrium quantity

Question 16

Effect of increase in supply on the supply curve

Answer 16

Factor increases supply -> supply curve shifts to the right -> increases equilibrium quantity -> reduces equilibrium price

Question 17

Effect of decrease in supply on the supply curve

Answer 17

Leftward shift -> reduces equilbrium quantity -> increases equilibrium price

Question 18

What is a market equilibrium?

Answer 18

When the market price equates the quantity supplied and the quantity demanded, the supply and demand curves intersect

Question 19

Excess demand in the market

Answer 19

Shortage, price is below the equilibrium price, tends to raise the price to get back up to the equilibrium

Question 20

Excess supply in the market

Answer 20

Surplus, price is above the equilibrium price, tends to reduce the price to head down to the equilibrium

Question 21

Economic surplus

Answer 21

The sum of consumer and producer surplus

Question 22

Consumer surplus

Answer 22

Measured by: area below market demand and above equilibrium price

Question 23

Producer surplus

Answer 23

Measured by: area above market supply and below equilibrium price

Question 24

Price ceiling

Answer 24

When the price is imposed BELOW the free market equilibrium price
Reduces quantity supplied -> leads to excess demand unless government provides extra quantity required

Question 25

Price floor

Answer 25

When the price is imposed ABOVE the free market equilibrium price
Reduces quantity demanded -> leads to excess supply unless government adds its own demand to the private sector