IB Demand + Supply

Question 1

Define the equilibrium price/market-clearing price

Answer 1

price at which quantity demanded = quantity supplied

Question 2

Define marginal costs (2)

Answer 2

additional cost of producing a unit of output

change in total cost/change in output

Question 3

Describe signaling function of prices (2)

Answer 3

shortages and surpluses will provide signals to consumers + firms on state of market

resources will be reallocated due to changes in price

Question 4

Define total utility

Answer 4

total satisfaction consumers get from consuming things

Question 5

Define consumer surplus (2)

Answer 5

highest price individuals would be able to pay - price consumers actually pay

area under demand curve above equilibrium price

Question 6

Define marginal product

Answer 6

additional output produced by one additional unit of a variable input

Question 7

Name non-price determinants of supply (8)

Answer 7

cost of FOPs

technology

prices of substitute (competitive supply)

price of complement (joint supply - 2 or more products derived from production of single product)

firm price expectations

taxes + subsidies

no. of firms

supply-side shocks

Question 8

Define community surplus

Answer 8

consumer + producer surplus

Question 9

Define marginal utility

Answer 9

extra satisfaction consumers receive from consuming one more unit of a good

Question 10

Define utility in economics

Answer 10

satisfaction consumers gain from consuming something

Question 11

Define marginal costs (4)

Answer 11

extra cost from each additional input added

marginal cost increases as QTY increases

producers will only produce extra units if price increases

can be displayed as supply curve

Question 12

Define short run (2)

Answer 12

time period when a FOP’s quantity or quality cannot be changed

short run if firm has at least one fixed input

Question 13

Define social surplus/total surplus (2)

Answer 13

sum of consumer surplus and producer surplus

social surplus is largest at equilibrium quantity + price than any other quantity

Question 14

Free goods in terms of quantity demanded and supplied

Answer 14

quantity supplied > quantity demanded when prices is 0

Question 15

Define the vertical supply curve (3)

Answer 15

quantity supplied will not be influenced by price + remains constant

fixed quantity of good supplied as there is no time to produce more of it

fixed quantity of good as there is no way of producing more of it

Question 16

Allocation between marginal cost and marginal benefits (3)

Answer 16

MB = MC : society is allocating the right amount to the good + producing quantity most desired by society

MB > MC : society places more value on the last unit of good produced than the cost to produce it –> should produce more

MB < MC : costs more for society to produce last unit of good than value placed on it –> should produce less

Question 17

Define individual supply

Answer 17

quantities at which a firm is willing/able to produce a good at any given in a certain time period

Question 18

Define long run (2)

Answer 18

time period when all FOP’s quantity or quality can be changed

all FOP’s are variable

Question 19

Define supply-side shocks

Answer 19

sudden unpredictable events which can affect supply

Question 20

Define rationing (3)

Answer 20

controlled distribution of resources

necessary when goods + resources are scarce

price is usually the best rationing function

Question 21

Define excess supply (surplus)

Answer 21

quantity supplied > quantity demanded

Question 22

Name non-price determinants of demand (4)

Answer 22

Income (in the case of normal goods + inferior goods)

preferences/tastes

prices of substitutes + complements

Number of consumers

Question 23

Define the law of diminishing returns

Answer 23

output of each unit decreases as firm increases n.o of unit in short term

Question 24

Features of market disequilibrium (2)

Answer 24

quantity demanded not = to quantity supply - excess demand or excess supply

temporary - forces of demand + supply cause price to change until market reaches equilibrium

Question 25

Define price mechanism

Answer 25

how supply and demand interact to determine prices

Question 26

Define the income effect (2)

Answer 26

decrease in price increases consumer’s purchasing power/real income

quantity demanded increases as you can buy more goods

Question 27

Define competitive market equilibrium (2)

Answer 27

where quantity demanded = quantity supplied

there is no tendency for the price to change due to competition

Question 28

Define market equilibrium (2)

Answer 28

point where supply curve of a good/service crosses the demand curve

state of balance - 2 opposing forces equally matched

Question 29

Define marginal benefit (4)

Answer 29

extra benefit you get from each additional unit that you buy

marginal benefit decreases as QTY increases

so the price the consumer is willing to pay also decreases as QTY increases

can be displayed as demand curve

Question 30

Define the law of diminishing marginal utility (2)

Answer 30

as consumption increases, marginal utility decreases

consumers will buy additional units only if the price falls

Question 31

Define allocative efficiency (3)

Answer 31

producing the quantity of goods most wanted by society

economy allocates its resources for consumers to get most utility

answers what + how much to produce

Question 32

Define the law of diminishing marginal returns (2)

Answer 32

marginal product increases when more units of a variable input are added to a fixed input

up till a certain point where marginal product begins to decrease

Question 33

Explain the law of supply (2)

Answer 33

firm will be willing/able to supply if price is enough to cover costs

firms can only produce more output if price is able to cover cost of extra unit produced

Question 34

Explain the relationship between law of diminishing marginal return and law of marginal costs (4)

Answer 34

each worker produces more output at low output levels

as a result, cost of producing each additional unit of output falls

at high output levels each worker produces less output

as a result, cost of producing each extra unit increases

Question 35

Describe incentive function of prices (2)

Answer 35

firms + consumers motivated by incentives fueled by profit or utility

incentives change how firms + consumers behave

Question 36

Define market demand (2)

Answer 36

total quantities in market for goods consumers are willing/able to buy at any price

sum of individual demand for a good

Question 37

Define excess demand (shortage)

Answer 37

quantity demanded > quantity supply

Question 38

Explain producer expectations as a factor of supply (2)

Answer 38

firms may withhold current supply if they expect prices to rise so they may sell at higher prices

firms may increase current supply if they expect prices to fall so they can sell at current higher price

Question 39

Define the law of marginal costs (2)

Answer 39

marginal costs decrease as each additional unit of output is produced

untill a certain point where marginal costs begin to increase

Question 40

Justification for government intervention in allocative efficiency (4)

Answer 40

1. markets are not efficient in real world so require gov. interv.

inefficiency cause welfare/deadweight loss

2. competitive markets cannot answer “for whom to produce” question

gov. help to distribute goods

Question 41

Define producer surplus (2)

Answer 41

price received by firms for selling their product - lowest price they are willing to accept to produce good

area above supply curve under equilibrium price

Question 42

Define market supply (2)

Answer 42

total quantities firms are willing/able to supply in market at any given price

sum of all individual supplies of a good

Question 43

Define the substitution effect

Answer 43

price increases –> consumer buys more of the substitute good –> decreases quantity demanded

Question 44

Relationship between law of diminishing marginal return and the law of marginal costs (2)

Answer 44

marginal product increase = marginal cost decrease

marginal product maximum when marginal cost minimum