L3 - Supply and Demand

Question 1

What is Demand?

Answer 1

Demand is how much buyers want to purchase of a good or service at a given price

Question 2

What is Supply?

Answer 2

Supply is how much sellers are willing to produce of a good or service at given price

Question 3

What are Agents?

Answer 3

any who makers decision relevant to our theory

Question 4

Who are the agents in the basic model?

Answer 4

• Many buyers (consumers)
• Many sellers (firms, producers)
• No government

Question 5

What are Product markets?

Answer 5

• The marketplace in which a final good or service is bought and sold. A product market does not include trading in raw or other intermediate materials, and instead focuses on finished goods purchased by consumers, businesses, the public sector and foreign buyers.
• Buyers = individuals & sellers = firms

Question 6

What are Factor markets?

Answer 6

• A factor market is the place where companies buy what they need to produce their goods and services. This market is also referred to as the input market
• Buyers = firms & sellers = individuals

Question 7

What are the Assumption of the Firms in the Basic Model?

Answer 7

• Sell one product
• Maximize their individual profit (Revenue minus total costs)
• Profit = price x quantity – total costs (corrected)
• Cannot influence the price, i.e. they are price takers

Question 8

What are the assumption of the Consumers in the Basic Model?

Answer 8

• Maximize their individual satisfaction, i.e. their utilities
• Utility determines the maximum willingness to pay
• Consumers buy the product if the price is below there maximum willingness to pay

Question 9

What does Ceteris Paribus stand for?

Answer 9

• other things being equal

- in the theory of supply and demand everything stays the same but the price variable

Question 10

What is the nature of demand?

Answer 10

The amount of a product that consumers wish to purchase at a
given price is: the quantity demanded
- This is not the amount that is actually purchased: it’s the desired amount
- The quantity demanded is expressed in terms of a time period

Question 11

What is the Law of Demand?

Answer 11

When the price of a good rises, the quantity demanded will fall

• Income effect: people feel poorer
• Substitution effect: people change their behaviour and buy similar or rival goods/ services

Question 12

How can the demand curve by interpreted?

Answer 12

The demand curve shows the relationship between the quantity of a good
demanded and it’s price, ceteris paribus (all other things remain equal)

Horizontal interpretation:
- Starting from any price, the demand curve shows what the quantity
demanded will be

Vertical interpretation:
- Start with any given quantity: the demand curve shows the maximum price
that a buyer is willing to pay for this unit of the product

Question 13

What can cause a shift in demand?

Answer 13

• Change in prices of related goods
• Change in total income
• Change in taste
• Change in number of buyers
• Changes in expectations of the future, individual characteristics,
  environmental factors

Question 14

How does changes in price of related good cause a shift in Demand?

Answer 14

Substitutes:
- demand shifts to the right when the price of a substitute increases
- demand increases: people will switch away from the more expensive
alternative

Complements:

• demand shifts to the left when the price of a complement increases
• demand decreases: people stop purchasing the complement

Question 15

How can Changes in total income cause a shift in Demand?

Answer 15

Demand is likely to shift to the right when income rises
- the more affluent people are, the more they are willing to pay to have stuff

Normal goods

• An increase in income shifts the demand curve to the right
• More is consumed at each possible price

Inferior goods

• An increase in income shifts the demand curve to the left
• Less is consumed at each possible price

Question 16

How can Changes in Taste cause a shift in Demand?

Answer 16

Demand shifts to the right if consumers find the product more desirable
- people are willing to pay more
for desirable stuff
-  tastes are affected by fashions
and advertisement

Question 17

How can Changes in number of Buyers cause a shift in Demand?

Answer 17

Demand shifts to the right when there are a greater number of buyers
- more people are willing to buy at a given price

Question 18

How can Changes in expectations of the future, individual characteristics,
environmental factors cause a shift in demand?

Answer 18

Demand will shift depending on
- consumers expectations of the future: future income, future prices and
future supply
- their individual characteristics: e.g., decreasing number of children per
family, increasing number of retired people etc.
- environmental factors: e.g., weather forecasts

Question 19

What is the Nature of Supply?

Answer 19

The amount of a product that firms wish to supply at a given price is: the
quantity supplied
- This is the amount firms are willing to supply
- It should be expressed in terms of the time period for demand

Question 20

What is the Law of Supply?

Answer 20

When the price of a good rises, the quantity supplied will rise

• Scale effect: a firm’s costs rise as it produces more, i.e. their production methods are less productive than before
• Entry effect: high cost firms enter the market because they can make a profit due to the higher price

Question 21

How can you Interpreting the Supply Curve?

Answer 21

The supply curve shows: the relationship between quantity supplied and price,
ceteris paribus.

Horizontal interpretation:
- Starting from any given a price: the supply curve shows what the quantity
supplied will be

Vertical interpretation:
- Start with any given quantity: the supply curve shows what the minimum
price that a seller is willing to accept for this unit of the product

Question 22

What causes Shifts in Supply?

Answer 22

• change in input prices
• Changes in Technology
• changes in number of sellers
• random shocks

Question 23

How can Changes in Input prices causes a shift in supply?

Answer 23

Supply is likely to shift to the left when the prices of inputs rise
- the minimum price sellers willing to accept increases

Question 24

How can Changes in Technology cause a shift in supply?

Answer 24

Supply is likely to shift to the right when there is technological advancement
- more can be produced using fewer resources

Question 25

How can changes in Number of Sellers cause a shift in supply?

Answer 25

Supply is likely to shift to the right when there are more sellers
- more is produced at any given price

Question 26

How can Random Shocks cause a shift in Supply?

Answer 26

Supply is likely to shift to the left when there is an unpredictable shortage
- at a given price, sellers can supply less than before