Microeconomics

Question 1

Markets

Answer 1

A place where buyers and sellers meet to engage in mutual trade where prices are set by the interaction of demand and supply.

Question 2

Demand

Answer 2

The willingness and ability of consumers to purchase a good or service at a given price in a given time period.

Question 3

Law of demand

Answer 3

A negative casual relationship showing the state that as the price of a product falls, the quantity demanded of the product will usually increase, ceteris paribus.

Question 3

Why is there an increase in demand?

Answer 3

1. Income effect: falling prices of a product allows consumers to increase their “real income” which reflects the amount that their incomes will buy.
2. Substitution effect: falling prices of a product will be relatively more attractive as they substitute it for products previously purchased.

Question 4

What are non-price determinants of demand?

Answer 4

1. Income
   - normal goods: essential goods; as income rises, the demand for these products will also rise.
   - inferior goods: not as good as normal goods; as income rises, the demand for these products will decrease as consumers buys higher priced substitutes instead.
2. The price of other products
   - substitutes: change in A will cause a change in B as the price of A falling will lead to a higher demand of it, therefore resulting a fall of demand for B.
   - complements: products purchased together. A change in C will cause a change in D as the price of C falling will lead to a higher demand of it as well as an increasing demand for D.
   - unrelated goods: change in price of one product will have no effect upon the demand for the other.
3. Tastes/Preferences
   Market favors alter the demand of a product
4. Other factors
   - size of population: growth = increasing demand
   - change in age structure of population: alter the change in demand for certain products
   - change in income distribution: if the gap shortens, there may be an increase for necessity goods
   - seasonal changes: change of pattern of demand

Question 5

Distinction between movement along and a shift of the demand curve.

Answer 5

A change of the price of the good itself leads to a movement along the existing demand curve.
A change in any of the other determinants of demand will always lead to a shift of the demand curve to either the left or the right.

Question 6

Supply

Answer 6

The willingness and ability of producers to produce a good or service at a given price in a given time period.

Question 7

Law of supply

Answer 7

A positive casual relationship showing the state that as the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus.

Question 8

Change in the quantity supplied.

Answer 8

A change in the price of the product itself will lead to a change in the quantity supplied (ie. a movement along the existing supply curve)
This occurs because at higher prices there will be more potential profits to be made so the producer will increase output.

Question 9

What are non-price determinants of supply?

Answer 9

1. Costs of factors of production
2. Price of other products the producer can produce instead of the existing product
   - If the price of A rises when producing A and B costs the same, producers will choose to produce A instead of B as they gain more profit
3. State of technology
4. Expectations
   - vary among assumptions about product prices in the future
5. Government intervention
   - indirect taxes: taxes added on goods and services that add up to the price of a product.
   - subsidies: payments made to firms that will produce certain products in support of reducing their costs.