Mod 2 - Topic 1 - Supply and demand

Question 1

What is demand?

Answer 1

Quantities of a good or service that people are ready (willing and able) to buy at various prices within some given time period.

Question 2

What is market demand?

Answer 2

The sum of all the individual demands.

Question 3

What is the law of demand?

Answer 3

The inverse relationship between price and the quantity demanded of a good or service.

Question 4

What does a change in price lead to (with regard to demand) and how is this shown on a graph?

Answer 4

It changes the quantity demanded and is shown as a movement along the demand curve.

Question 5

What does a change in non-price factors lead to (with regard to demand) and how is this shown on a graph?

Answer 5

It changes the level of demand and is shown as a shift in the demand curve.

Question 6

What are the non-price determinants of demand? (5)

Answer 6

1) tastes and preferences
2) income
3) prices of related products
4) future expectations
5) number of buyers

Question 7

What is supply?

Answer 7

The quantities of goods or services that people are ready to sell at various prices within some given time period.

Question 8

What does a change in price lead to (with regard to supply) and how is this shown on a graph?

Answer 8

Changes the quantity supplied and is shown as a movement along the supply curve.

Question 9

What does a change in non-price factors lead to (with regard to supply) and how is this shown on a graph?

Answer 9

It changes the level of supply and is shown as a shift in the supply curve.

Question 10

What are the non-price determinants of supply? (5)

Answer 10

1) costs and technology
2) prices of other goods or services offered by the seller
3) future expectations
4) number of sellers
5) weather conditions

Question 11

What is the equilibrium price?

Answer 11

The price that equates the quantity demanded with the quantity supplied

Question 12

What is the equilibrium quantity?

Answer 12

The amount that people are willing to buy and sellers are willing to offer at the equilibrium price.

Question 13

What is a shortage?

Answer 13

A market situation in which the quantity demanded exceeds the quantity supplied - shortage occurs at a price below the equilibrium level.

Question 14

What is a surplus?

Answer 14

A market situation in which the quantity supplied exceeds the quantity demanded - surplus occurs at a price above the equilibrium level.

Question 15

What is comparative statistics?

Answer 15

It is a form of sensitivity (what if) analysis and is commonly used in economic analysis

Question 16

What is the 5 step process of comparative statistic analysis?

Answer 16

1) state the assumptions needed to construct the model
2) begin by assuming the model is in equilibrium
3) Introduce a change in the model creating disequilibrium
4) find the new point at which equilibrium is restored
5) compare the new equilibrium point with the old one

Question 17

What is the Short-Run? (2)

Answer 17

It is the period of time in which:

• Sellers in the market respond to a change in equilibrium price by adjusting variable inputs
• Buyers in the market respond to changes in equilibrium price by adjusting the quantity demanded for the good or service.

Question 18

What do short-run changes show?

Answer 18

The rationing function of price, which is the increase/decrease in price to clear the market of any shortage or surplus.

Question 19

Why is rationing function of price considered to be a short-run function?

Answer 19

Because both buyers and sellers are expected to respond only to price changes.

Question 20

In the short-run, what will:

a) an increase in demand cause?
b) a decrease in demand cause?

Answer 20

a) the price and quantity to rise

b) the price and quantity to fall

Question 21

In the short-run, what will:

a) an increase in supply cause?
b) a decrease in supply cause?

Answer 21

a) the price to fall and the quantity to rise

b) the price to increase and the quantity to fall

Question 22

What is the long-run? (4)

Answer 22

It is the period of time in which:

• new sellers may enter a market
• existing sellers may exit the market
• existing sellers may adjust fixed factors of production
• buyers may react to a change in equilibrium price by changing their tastes and preferences.

Question 23

What is Adam Smith famous for?

Answer 23

Referring to the shifting of resources into and out of markets in response to price changes as the invisible hand.

Question 24

What does the long-run show?

Answer 24

The guiding or allocating function of price, which is the movement of resources into or out of markets in response to a change in the equilibrium price.

Question 25

How does a short-run increase in demand (which causes prices to rise) play out in the long-run?

Answer 25

Supply increases as new sellers enter the market and original sellers increase their production capacity.

Question 26

How does a short-run decrease in demand (which causes prices to fall) play out in the long-run?

Answer 26

Supply decreases as less profitable firms or those experiencing losses exit the market or decrease production.

Question 27

How does a short-run increase in supply (which causes the price to fall) play out in the long run?

Answer 27

Demand increases as tastes and preferences of consumers eventually change in favour of the product relative to substitutes.

Question 28

How does a short-run decrease in supply (which causes the price to increase) play out in the long run?

Answer 28

Demand decreases as tastes and preferences of consumers eventually change away from the product and toward the substitutes.

Question 29

What is perfect competition?

Answer 29

Where the forces of supply and demand are the sole determinants of the market price. Ie. price is not influenced by any single firm.

Question 30

What is market power? and where does this occur? (5)

Answer 30

Market power is the power to set the market price and it occurs where there is imperfect competition, so individual firms exert power over price due to:

• size
• product differentiation
• advertising
• brand / name
• features or service