Micro 3 - Demand and Supply

Question 1

Define the term margin

Answer 1

The margin is the change in a variable caused by an increase of one unit of another variable

Question 2

How do you calculate marginal cost?

Answer 2

Marginal cost can be calculated by finding the difference between the total cost at the new output level and the total cost at one unit less than that

Question 3

What does traditional economic theory suggest that economic agents want to do?

Answer 3

Maximise their utility

Question 4

What do economists argue that in order to maximise utility economic agents must do what?

Answer 4

They must act rationally which means they will make decisions based solely on trying to gain the maximum utility possible and nothing else will influence their decision making.

Question 5

Define marginal utility

Answer 5

Marginal utility is the benefit gained from consuming one additional unit of a good

Question 6

Define total utility

Answer 6

Total utility is the overall benefit gained from consuming a good

Question 7

Define the law of diminishing marginal utility

Answer 7

For each additional unit of a good that’s consumed the marginal utility gained decreases

Question 8

A rational consumer will choose to consume a good where…

Answer 8

Marginal utility = price

Question 9

What is the formula for profit?

Answer 9

Total revenue - Total costs

Question 10

Why would producers want to maximise profits as an economic objective?

Answer 10

Reinvest profits back into the business for things like expansion
Ensures that the firm survives

Question 11

What other quantities may producers want to maximise instead of profits?

Answer 11

• Maximise sales
• Maximise market share - A larger market share could lead to the firm getting some monopoly power which would mean they can charge higher prices due to a lack of competition.
• Some firms may also have some ethical objectives.

Question 12

What are the typical economic objectives of consumers?

Answer 12

Consumers are assumed to want to maximise their utility without spending more than their income.
Consumers can also act as workers - workers are assumed to want to maximise their income while having as much free time as they need or want

Question 13

What are the economic objectives of governments and what do they include?

Answer 13

Governments try to balance the resources of a country with the needs and wants of the population (maximising the public interest)
This includes:
- Economic growth
- Full employment
- Low inflation

Question 14

Why are government methods of maximising public interest known as competing objectives?

Answer 14

As they are policies that help achieve one objective but may make it more difficult to achieve another

Question 15

What is a market?

Answer 15

A market is anywhere buyers and sellers can exchange goods or services

Question 16

What is the price charged for and the quantity sold for each good determined by?

Answer 16

The levels of supply and demand in a market

Question 17

Define demand

Answer 17

Demand is the quantity of a good/service that consumers are willing and able to buy at a given price at a particular time

Question 18

What effect does a change in price have on a demand curve?

Answer 18

It causes a movement along the demand curve. (Contraction or Extension)

Question 19

How does a change in demand affect the demand curve?

Answer 19

It causes it to shift left or right

Question 20

When there is a decrease in demand does the demand curve shift left or right?

Answer 20

Left

Question 21

When there is an increase in demand does the demand curve shift left or right?

Answer 21

Right

Question 22

What are some factors that can cause a shift in the demand curve?

Answer 22

• Changes in tastes and fashion
• Changes to people’s real income

Question 23

What are normal goods?

Answer 23

Normal goods are those which people will demand more of if their real income increases. This means that a rise in real income causes the demand curve to shift to the right.

Question 24

What are inferior goods?

Answer 24

Inferior goods are those which people demand less of if their real income increases. This means that a rise in real income causes the demand curve to shift to the left.

Question 25

What effect will a more equal distribution of income have on the demand curve for luxury goods?

Answer 25

The demand curve for luxury goods will shift to the left and the demand curve for other items will shift to the right.

Question 26

What does it mean when some markets are interrelated?

Answer 26

A change in one market affects a related market.

Question 27

What are substitute goods?

Answer 27

Substitute goods are those which are alternatives to each other. An increase in the price of one good will decrease the demand for it and increase the demand for its substitutes. This is also known as competitive demand.

Question 28

What are complementary goods?

Answer 28

Complementary goods are goods that are often used together so they’re in joint demand. E.g. If the price of strawberries increases demand for them will decrease along with demand for cream.

Question 29

What effect may the introduction of a new good have on the demand curve for its substitutes and complementary goods?

Answer 29

It will cause it to shift to the left for substitute goods and to the right for complementary goods.

Question 30

What is derived demand?

Answer 30

Derived demand is the demand for a good or a factor of production used in making another good or service.

Question 31

What type of demand is it when some goods have more than one use?

Answer 31

Composite demand.

Question 32

Define supply

Answer 32

Supply is the quantity of a good or service that producers supply to the market at a given price at a particular time.

Question 33

What does a supply curve show?

Answer 33

A supply curve shows the relationship between price and quantity supplied. At any given point on the curve it shows the quantity of the good or service that would be supplied at a particular price.

Question 34

What causes movement along the supply curve?

Answer 34

Changes in price

Question 35

Do supply curves slope upwards or downwards and what does this mean?

Answer 35

Supply curves usually slope upwards. This means that the higher the price of a good the higher the quantity supplied.

Question 36

Why does higher prices encourage producers and sellers to increase supply?

Answer 36

Producers and sellers aim to maximise profits. Other things remaining equal the higher the price for a good or service the higher the profit. Higher profit provides an incentive to increase supply therefore supply increases with price.

Question 37

When will firms only producer more?

Answer 37

If the price increases by more than the costs of production

Question 38

What effect does increases prices have on marginal firms?

Answer 38

It will make it more profitable for marginal firms to supply the market which increases market supply levels

Question 39

What effect does changes in supply have on the supply curve?

Answer 39

It causes it to shift

Question 40

What are the conditions of supply?

Answer 40

• Changes in the costs of production
• Improvements in technology
• Changes in the productivity of factors of production
• Indirect taxes and subsidies
• Changes in price of other goods
• Changes in the number of suppliers

Question 41

Define the term ‘effective demand’

Answer 41

If a want is backed up by the ability to pay then it is known as effective demand