Market forces

Question 1

what variables influence the demand for goods and services

Answer 1

• the substitution effect
• the income effect

Question 2

explain the income effect

Answer 2

the income effect is a change in the quantity demanded that results from an effect of a change in a price of good or service on consumer purchasing power

Question 3

how does the income effect influence demand?

Answer 3

Normal goods: as income rises the demand for normal goods increase, as income decreases, so does the demand for normal goods

Inferior goods: as income decreases, the demand for inferior goods increase. As income increases, the demand for inferior goods decreases.

Question 4

explain the substitution effect

Answer 4

the change in the quantity demanded that results from a change in price, making the good or service more or less expensive in comparison to substitutes

Question 5

state the law of demand

Answer 5

ceteris paribus, the quantity of a product demanded increases when the price falls and decreases when prices rise

Question 6

with reference to the demand curve what happens when the quantity demanded changes

Answer 6

movements along the curve

Question 7

with reference to the demand curve what happens when demand changes

Answer 7

the curve shifts

Question 8

state the law of supply

Answer 8

when the price of a product rises, the quantity supplied will increase, and decrease when prices decrease.

Question 9

what causes a supply curve to shift?

Answer 9

changes in the prices of inputs
technology
the price of substitutes
expected future prices
number of firms in the market

Question 10

what is technological change?

Answer 10

a change in the ability of a firm to produce output with a given quantity of inputs.

Question 11

what is productivity?

Answer 11

Productivity is the output produced per unit of input

Question 12

what is the difference between a change in supply and a change in the quantity supplied?

Answer 12

a change in supply refers to a shift in the supply curve
a change in the quantity supplied refers to movements along the demand curve

Question 13

what variables cause the demand curve to shift

Answer 13

changes in:
income
prices of related goods
tastes
population
demographics

Question 14

what is market equilibrium

Answer 14

where demand curve intersects the supply curve

Question 15

what is a competitive market equilibrium

Answer 15

equilibrium in a market with many buyers and sellers

Question 16

what happens when prices are above equilibrium?

Answer 16

this will create a surplus as the quantity supplied is greater than the quantity demanded. eventually market prices will fall until a new equilibrium point is reached.

Question 17

what happens when prices are below equilibrium?

Answer 17

shortages: with the quantity demanded being greater than the quantity supplied. eventually prices will rise until the quantity supplied intersects the quantity demanded

Question 18

if demand increases by more than supply then over time the equilibrium price will…

Answer 18

rise