Micro part 3- Supply and demand, price volatility

Question 1

Define market

Answer 1

1. Market – any set of convenient arrangements for buyers/sellers to communicate and exchange g/s

Question 2

Define sub-market

Answer 2

2. Sub-market – a market which is a distinctive part of another market, with a different market structure

Question 3

What are the 7 types of demand

Answer 3

1. Individual demand – demand curve of an individual buyer
2. Market demand – the sum of all individual demand in the market
3. Demand – quantity of g/s that consumers are willing and able to buy at a given price in a given time period
4. Derived – when the demand for a factor of production is the result of the demand for a good
5. Joint – when two or more complements are bought together
6. Composite – when a good is demanded for two or more different uses
7. Competitive – when two or more goods are substitutes for each other

Question 4

What is Marginal utility

Answer 4

1. The extra satisfaction gained from consuming one extra unit of the g/s

Question 5

Describe the demand curve

Answer 5

1. Demand curve is downwards sloping due to the law of diminishing MU (consumer surplus declines with extra units consumed).
2. This is because the extra unit generates less utility than the one already consumed, meaning consumers are willing to pay less for each unit

Question 6

What happens as price of a good increases

Answer 6

1. the good becomes more expensive than alternatives (substitution effect), causing consumers to switch to other substitutes
2. reduced income (income effect)

Question 7

Describe Demand curve movements

Answer 7

1. When price increases there is a contraction
2. when price falls there is an extension along the demand curve
3. Only price can cause movements along demand curve – a price change does not shift demand curve

Question 8

What are 7 factors that shift the demand curve

Answer 8

1. population -
2. income
3. related goods
4. season
5. advertising
6. tastes
7. expectations

Question 9

What is consumer surplus

Answer 9

1. The difference between the price the consumer is willing and able to pay, and the price they actually do pay for a g/s
2. Declines due to law of diminshing marginal returns
3. Inelastic demand curves have high consumer surplus because consumers are willing to pay more for the good

Question 10

What effect does supply and demand have on consumer surplus

Answer 10

1. Increase when demand increase since they are prepared to pay a higher price for the same quantity as they have placed greater value on it
2. Increase when supply increases because it results in an increase in quantity bought
3. Increase in demand/supply = higher consumer and producer surplus

Question 11

What are the 5 types of supply

Answer 11

1. Individual supply – supply curve of an individual producer
2. Market supply – supply curve of all producers within the market. In a perfectly competitive market it is calculated by summing all the individual supply curves
3. Joint – when two or more goods are produced together so that a change in supply of one good will change the supply of the other good in joint supply
4. Composite – where demand for a good can be satisfied by the supply of two or more goods that are substitutes for each other
5. Competitive – is where two or more alternate goods can be produced from the same factors of production

Question 12

What is the relationship between price and quantity supplied

Answer 12

1. When price increases it is more profitable for firms to supply the good so supply increases
2. High prices encourage firms to enter the market for the chance of ANP so supply increases
3. As output increases then so do a firms’ costs so need to charge a higher price to cover this

Question 13

Describe a supply curve

Answer 13

1. When prices increases there is an extension, when decreases there is a contraction along the curve
2. The curve shifts when there is a change in amount supplied at every price

Question 14

What factors can cause a shift in a supply curve

Answer 14

1. CoP change as reduces profits
2. productivity as gets more output from unit of input
3. tech as it reduces CoP
4. tax/subsidy
5. changes in price of other goods as may switch to another if its more profitable

Question 15

What is producer surplus

Answer 15

1. difference between the price the producer is willing to charge and the price that actually charge.
   2, The PB gained by produced that covers their costs – profit

Question 16

What effect does supply and demand have on producer surplus

Answer 16

1. Increases when demand or supply increases
2. Increase in demand result in higher equilibrium output and prices
3. Increase in supply results in lower prices but higher equilibrium output

Question 17

What is market equilibrium

Answer 17

1. In equilibrium when demand = supply
2. Found in a free market through the free interaction of supply and demand, known as market forces
3. When demand/supply curves shift then new market equilibriums are found

Question 18

What happens to price at market equilibrium

Answer 18

1. At equilibrium price has no tendency to change – know as the market clearing price
2. this is not necessarily the current market price of the price that the market moves towards
3. neo classical believe markets tend to clear since when there’s excess demand then firms can raise prices and still sell all their product.
4. When there is excess supply then some product is not sold, so can either not change price and risk not selling product or lower price to sell product

Question 19

What is excess supply

Answer 19

1. Excess supply is when quantity supplied to a market is greater than quantity demand.
2. Price will fall as firms try to sell the products

Question 20

What is excess demand

Answer 20

1. Excess demand is when demand is greater than supply.

2. This means there’s a shortage in the market which pushes up prices

Question 21

What are 7 assumptions of supply/demand

Answer 21

1. Only shows one market
2. Assumes that as price increases then supply increases
   a) except in a labour market where an increased wage may encourage worker to work less hours to maintain current s of l and have more leisure time so supply falls
3. Assumes that as price increases then demand falls
   a) except veblen goods where people get satisfaction from being seen with them
   b) except giffen goods which are a unique type of inferior good for low income earners where if price rises then have less income to spend on the more expensive substitute so spend more on the good which increased price
4. Assumes there is perfect information and perfectly competitive
5. Relies on ceteris paribus where all other factors remain the same
6. In real life consumers are unlikely to have perfect information, but useful in competitive markets where there are many buyers and sellers
7. Overall limited real world use yet does give a broad picture of how demand/supply work making it simple and easy to understand

Question 22

What is a commodity

Answer 22

1. A raw material or agricultural product, usually can be easily substituted for another good.
2. They are in competitive demand which can make demand volatile

Question 23

What happens when there is low supply of commodities

Answer 23

1. Low supply forces prices up through the price mechanism

Question 24

Describe supply and demand of food

Answer 24

1. Inelastic demand as it’s a necessity
2. Supply is inelastic as food is perishable. This means a small change in supply can create a large change in price
3. Supply is unstable due to supply side shocks, cobweb diagrams

Question 25

What affects does supply and demand of food have

Answer 25

1. unemployment when demand falls when needing to export. This is because after crops are harvested there is less need for employment – seasonal unemp.
2. unpredictability can lead to less investment
3. food is a major part of income so when price increases disposable income falls potentially causing a recession as less income to spend on other goods

Question 26

Why are long run prices of food declining

Answer 26

1. technological improvements are increasing supply as can now be harvested in a more efficient way, more entrants into the international food market as trade liberalisation increases
2. demand for meat may be falling due to changing consumers preferences e.g. vegetarianism

Question 27

Describe effects of increase and decrease of housing prices

Answer 27

1. Take a large portion of consumer wealth
2. When price increases then people feel wealthier due to the wealth effect as ration of market value to mortgage rate has increased. Can increase consumption
3. but if price falls then can create negative equity. This means that when they sell the house they can’t pay off the amount they owe on it

Question 28

Describe the supply of housing

Answer 28

1. In the l.r. and s.r. supply is inelastic since the supply can’t be quickly increased as it takes time to build new houses.
2. As supply can’t be increased quickly in the s.r. it means increased demand can cause sharp increases in price.
3. This volatility makes d/s diagrams less useful

Question 29

Describe demand of housing

Answer 29

1. Demand is inelastic since there are no close substitutes for housing and it’s a necessity

Question 30

What are demand side factors that can determine housing price

Answer 30

1. areas of high unemployment have low house prices and low demand
2. economic growth affects consumer confidence which affects willingness to take/give loans
3. houses bought via mortgage are dependent on interest rates

Question 31

Describe supply and demand of oil

Answer 31

1. Expectations play a huge part in determining price
2. When supply falls there is an increase in price which causes consumers to have a distaste for oil based goods e.g. cars
3. This will cause there to be a fall in demand which can reduce price again
4. Supplies are increasing with more drilling
5. CONTEXTUAL

Question 32

Describe supply and demand of transport

Answer 32

1. It is usually derived demand since its results from demand for other goods e.g. wanting to get places for leisure activities
2. Is generally PED and YED elastic
3. however car/air travel have positive YED but bus has negative
4. people may cut back on leisure travel if prices increase, yet still need to commute
5. XED since many transport modes are substitutes for each other
6. In the s.r. the supply of roads is fixed until new ones can be built which creates excess demand e.g. congestion
7. can be reduced by introducing a price P e.g. toll fare
8. Price is dependent on other industries e.g. petrol as they are in joint supply