Lecture 1

Question 1

What is Demand?

Answer 1

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

Question 2

What 2 factors affect demand?

Answer 2

1. Income Effect - prices increasing results in less disposable income so people can’t afford as much, hence demand decreases.
2. Substitution Effect - good is now more expensive than other good so people swop for alternatives.

Question 3

What assumption is the demand curve constructed under?

Answer 3

The demand curve is constructed under the assumption that other determinants of demand remain equal, only price is changing.

Question 4

How does a change in price affect the demand curve?

Answer 4

Change in price = demand curve shifts up or down.

Question 5

How is the demand curve affected by non-price determinants?

Answer 5

The demand curve shifts left or right.

Question 6

List the determinants of demand?

Answer 6

Price
Taste
Previous Experiences
Observing what others do
Health
Fashion

Substitute goods - number of competitors and their prices

Complementary goods - good consumed together (bread+butter - if the demand for one decreases, the demand for the other may also decrease).

Income - income increases then demand for good increases (normal goods). If income increases and demand for good doesn’t increase then it is an inferior good.

Expectations for future price changes - if prices are expected to fall then consumers may wait before purchasing.

Future income increase and decrease.

Question 7

Describe the supply relationship.

Answer 7

The higher the price of a product, the more the producer wants to supply to the market.

The higher the price of the product, the more profitable it is to make.

Cost of supplying the good increases with greater quantities of supply. Only worth producing more output when the price of a good increases.

Question 8

How does the supply curve change with price?

Answer 8

A change in price causes the supply curve to shift up or down.

Question 9

How does the supply curve change with non-price determinants?

Answer 9

The supply curve shifts left or right.

Question 10

What are the determinants of supply?

Answer 10

Cost of production - As cost increases, profit decreases. As costs increase, firms cut back production perhaps switching to a good whose costs haven’t risen as much.

Profitability of substitutes

Profitability of goods in joint supply.

Random shocks: nature/unpredictable events/weather

Aims of producer/manager - some may want to profit maximise others have different aims.

Expectations of future price changes - if prices are expected to rise, firms may temporarily reduce the amount they supply.

Question 11

What are the two meanings of substantivism?

Answer 11

Formal - Economics is the logic of rational action and decision making.

Economies and economic choices are embedded in society and culture.

Question 12

What is the problem of scarcity?

Answer 12

At any one time, the world can only produce a limited amount of goods and services. This is because the world has only a limited amount of resources.

Question 13

Define Scarcity

Answer 13

Scarcity is the excess of human wants over what can actually be produced.

Question 14

Define production

Answer 14

The transformation of inputs into outputs by firms to earn profits (or to meet some other objective).

Question 15

Define consumption

Answer 15

The act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services.

Question 16

Define factors of production (or resources)

Answer 16

The inputs into the production of goods and services: labour, land/raw materials and capital.

Question 17

Define labour

Answer 17

All forms of human input, both physical and mental, into current production.

Question 18

Define land/raw materials

Answer 18

Inputs into production that are produced by nature.

Question 19

Define capital

Answer 19

All inputs into production that have themselves been produced e.g factories, machines and tools.

Question 20

Define Microeconomics

Answer 20

Microeconomics is concerned with the individuals parts of the economy. It is concerned with the demand and supply of particular goods, services and resources.

Question 21

Define Macroeconomics

Answer 21

Macroeconomics is concerned with the economy as a whole. It is the study of economic aggregates.

Question 22

Define Aggregate Demand

Answer 22

The total amount of spending in the economy whether by consumers, the Government or firms when they stock up on raw materials.

Question 23

Define Aggregate Supply

Answer 23

The total national output of goods and services.