Markets

Question 1

What are the factors that affect demand?

Answer 1

-Price
-Price of substitutes
-Income
-Consumer preferences

Question 2

What effects a movement along the demand curve?

Answer 2

-Endogenous variables i.e price and quantity

Question 3

What effects a shift of the demand curve?

Answer 3

Exogenous variables

Question 4

What are the factors that affect supply?

Answer 4

-The price of a product
-The cost and technology of production
-The number of firms operating in the market

Question 5

What effects a movement along the supply curve?

Answer 5

-Endogenous variables i.e a change in price or quantity

Question 6

What effects a shift of the supply curve?

Answer 6

Exogenous variables

Question 7

What is the market clearing equilibrium?

Answer 7

Where the supply and demand curves intersect

Question 8

What happens if the price is higher than equilibrium?

Answer 8

Excess supply

Question 9

What happens if the price is lower than equilibrium?

Answer 9

Excess demand

Question 10

What happens with an exogenous increase in demand?

Answer 10

-Demand curve shifts outwards
-Equilibrium price and quantity is higher

Question 11

What happens with an exogenous increase in supply?

Answer 11

-Supply curve shifts outwards
-Equilibrium price is lower, equilibrium quantity is higher

Question 12

What are the different types of elasticity?

Answer 12

-Own price elasticity of demand
-Cross price elasticity of demand
-Income elasticity of demand
-Price elasticity of demand

Question 13

What is the equation for own price elasticity of demand?

Answer 13

-%change in quantity demanded/ %change in price
-[(dQ/Q)/(dP/P)]
-dQP/QdP
-(dQ/dP)*(P/Q)

Question 14

What are the classes of elasticity?

Answer 14

-Elastic demand = modulus >1
-Inelastic demand =modulus <1
-Unit elasticity= modulus = 1

Question 15

What does a perfectly inelastic demand curve look like?

Answer 15

• Perpendicular to x axis
  -Quantity demanded stays the same no matter what the priceW

Question 16

What does a perfectly elastic supply curve look like?

Answer 16

• Perpendicular to y axis
  -Price stays the same no matter quantity demanded

Question 17

How does price elasticity vary with a linear demand curve?

Answer 17

-Elastic until unit elasticity is reached
-Inelastic after unit elasticity
-Elasticity= (dQ/dP)*(P/Q)
-When Q=0, elasticity = infinity so highly elastic
-When P=0, elasticity =0 so inelastic

Question 18

Why is own price elasticity always negative?

Answer 18

• An increase in price will always lead to a decrease in demand, so therefore own price elasticity is always negative

Question 19

What is the equation for cross price elasticity of demand?

Answer 19

% change in quantity demanded in A/ % change in price of B

Question 20

What is the cross price elasticity of substitutes?

Answer 20

• Substitutes have a positive cross price elasticity

Question 21

What is the cross price elasticity of complements?

Answer 21

-Complements have a negative cross price elasticity

Question 22

What is the equation for income elasticity of demand?

Answer 22

-% change in quantity demanded/ %change in income

Question 23

What is the income elasticity of a normal good?

Answer 23

• Normal goods have a positive income elasticity
  -This means that more is demanded with an increase in income

Question 24

What is the income elasticity of an inferior good?

Answer 24

-Inferior goods have a negative income elasticity
-This is because as income increases, consumers switch to more expensive goods

Question 25

What is the equation for elasticity of supply?

Answer 25

• % change in quantity/ % change in price

Question 26

What sign is the elasticity of supply?

Answer 26

If the law of supply holds, the elasticity of supply is always positive

Question 27

In the long run, are supply and demand elastic or inelastic?

Answer 27

-Demand is elastic as consumers can adjust their behaviour and switch to alternative products
-Supply is elastic as new firms can enter the market, existing firms can leave, and firms can alter their production

Question 28

How does the supply curve change if the elasticity is higher?

Answer 28

The supply curve becomes steeper

Question 29

How does the demand curve change if the elasticity is higher?

Answer 29

The demand curve becomes flatter