LS9 and 10

Question 1

What is supply?

Answer 1

The quantity of goods and services that a producer is willing to sell at a given price level over a period of time

Question 2

What is revenue?

Answer 2

Income that the government or firm receives

Revenue= price x quantity

Question 3

What is the law of supply?

Answer 3

Ceteris paribus, as the price of a good increases quantity supplied decreases

Question 4

What does the supply curve show and why is it sloping downwards?

Answer 4

Shows the relationship between price and quantity supplied. Slopes downwards because as price increases, supply increases

Question 5

What does the demand supply curve assume?

Answer 5

Firms are motivated by profit and cost increases as supply increases

Question 6

What do shifts of the supply curve mean?

Answer 6

There is a decrease in supply at every price(left)

There is an increases in supply at every price(right)

Question 7

What factors cause shifts in supply curve?

Answer 7

Changes in production costs: increase in cost of raw material decreases supply

Improvements in technology: better technology reduces production costs which causes a rightward shift

Changes in productivity: increases productivity of factors of production mean that firms get more output per unit of factor

Changes in price of substitute and complementary goods: if a firm produces 2 goods and the price of one increases, the supply of the other will decrease

Number of suppliers: as number of supplier increases, supply increases

Question 8

What is and causes excess demand? How is it shown on a diagram? How is it removed?

Answer 8

When the demand for a good or service is greater than the quantity supplied

If price goes below equilibrium, there is excess demand and not enough supply so price is forced up. So supply extends and demand contracts

Shown by arrow below equilibrium

Question 9

What is and causes excess supply and how is it shown on a diagram? How is it removed?

Answer 9

Excess supply is when the quantity supplied in a market is greater than the quantity demanded

If price is above equilibrium, there is excess supply. This forces the price down so supply contracts and demand extends

Question 10

What is equilibrium price?

Answer 10

When the supply of goods is equal to the demand.

There is disequilibrium if there is an excess in demand or supply

Question 11

Why is equilibrium price known as market clearing price?

Answer 11

Because all products supplied to the market are bought(cleared) off the market so there is no excess demand or supply