E2A Market Forces

Question 1

define MACRO- and MICRO-economics

identify the decision makers involved in each

Answer 1

MACRO: the study of the economy as a whole
(govt)

MICRO: the study of individual sections of the economy
(households, firms)

Question 2

explain the ROLES of PRICE MECHANISM

Answer 2

rationing device, helps reach equilibrium:
• D > S → P+ → D- → D = S
•D < S → P- → D+ → D = S

gives producers incentive to respond to changesin D:
• D+ → P+ → S+ → more profit
•D- → P- → S- → avoid loss

Question 3

define MARKET EQUILIBRIUM and DISEQUILIBRIUM

Answer 3

EQUILIBRIUM:
• QD=QS
•  no shortage or surplus
• producer + consumer both satisfied
(vice versa for disequilibrium)

Question 4

define DEMAND

Answer 4

consumer’s willingness+ability to buy a product

Question 5

identify the factors that SHIFT DEMAND

Answer 5

Advertisement
P of substitute/complement
Preference
Population
Income 
Govt intervention (tax, IR, MS, regulation...)

Question 6

define SUPPLY

Answer 6

producers’ willingness+ability to produce a product

Question 7

identify the factors that SHIFT SUPPLY

Answer 7

COP
P of other goods
Tech/innovation
Natural disaster
Govt intervention  (tax, IR, subsidy, regulation...)

Question 8

what is the relationship between P and D and S?

Answer 8

increase in D → raise in P → extension in S
decrease in D → fall in P → contraction in S

increase in S → fall in P → extension in D
decrease in S → raise in P → contraction in D

Question 9

define PED/PES

Answer 9

the responsiveness of QD/QS to a change in P

Question 10

calculate PED

Answer 10

PED: %∆ in QD / %∆ in P
PES: %∆ in QS / %∆ in P

(Queue before you Pee)

Question 11

calculate %∆

Answer 11

[(new - old) / old] x 100%

Question 12

explain the influences on PED

Answer 12

(SPLAT)

• Substitute (availability, quantity, quality)
• Percentage of income
• Luxury or necessity
• Addictiveness
• Time (can purchase be postponed?)

Question 13

explain the USES of PED

Answer 13

firms: PRICING
- low PED → higher P → higher profit
- how much tax to pass on to consumers
- price discrimination

govt: TAXATION
- low PED → higher tax → higher tax revenue

Question 14

explain the influences on PES

Answer 14

(SMAT)

• Storage possibility (more stock ready)
• Mobility of FOP (quickly+cheaply+easily switch)
• Availability of factors (quickly+cheaply+easily switch)
• Time to produce (quickly change supply)

Question 15

explain the USES of PES

Answer 15

firms: PRICE INCENTIVE
• firms want S to be as elastic as possible → respond quickly → maximize revenue
eg. increase S when P increase → more profit; decrease S when P decrease → avoid loss

govt: INFO. ABT MARKET
- increase mobility of factors by E&T
- more efficient resource allocation

Question 16

how are prices determined in a market economy?

Answer 16

by interaction between D and S

Question 17

define ELASTIC and INELASTIC D/S

Answer 17

ELASTIC: changes in P → more than proportionate change in QD/QS

INELASTIC: changes in P → less than proportionate change in QD/QS

Question 18

define PRICE MECHANISM

Answer 18

interaction between D and S determines P

Question 19

define PLANNED ECONOMY
define MARKET ECONOMY
define MIXED ECONOMY

Answer 19

PLANNED:
govt allocates resource; only public sector

MARKET:
price mechanism allocates resource; only private sector

MIXED:
both govt+PM allocate resource; both public+private sectors

Question 20

what is a CONTRACTION in DEMAND?

Answer 20

rise in P → fall in QD
(draw diagram to illustrate)

Question 21

what is an EXPANSION in SUPPLY?

Answer 21

rise in P → rise in QS
(draw diagram to illustrate)

Question 22

what’s the difference between NORMAL and INFERIOR GOODS?

Answer 22

NORMAL: D increase when income increase
INFERIOR: D decrease when income increase

Question 23

which area is gained revenue?

which area is lost revenue?