Supply and demand

Question 1

Market

Answer 1

An institution that brings buyers and sellers together so they can interact and transact with each other

Question 2

Price system

Answer 2

A name given to market economy because prices provide considerable information to both buyers and sellers

Question 3

Market economy

Answer 3

System in which economic decisions and the pricing of goods and services are guided by the interactions of a country’s individual citizens and businesses

Question 4

Willingness to pay WTP

Answer 4

Maximum amount one is willing and able to pay for a good\service, which represents the highest value that a consumer believes the good/service is worth

Question 5

Demand

Answer 5

The maximum amount of a product that buyers are willing and able to buy over the some time periods at various time prices, holding all factors constant. In market economy there’s a negative relation between price and quantity demanded. As price increases the demand decreases and vice versa.

Question 6

Substitution effect

Answer 6

As a price of a good decreases, consumers will buy more of this good in place of alternative goods which are more expensive

Question 7

Income effect

Answer 7

As a price decreases, less money is spent on that good, freeing up income that can be used to buy more of all goods, including the good that has fallen in price

Question 8

Law of demand

Answer 8

As price increases, the demand decreases and vice versa. (Ceteris paribus)

Question 9

What can force the demand curve to shift?

Answer 9

Change in one or more of the determinants of demand

Question 10

Determinants of demand:

Answer 10

• consumers’ taste and preferences
• prices of substitutes and complements
• the number of buyers in a market
• expectations about future prices, incomes and product availability

Question 11

Normal goods

Answer 11

Products for which demand is positively linked to income - when income rises, demand rises too

Question 12

Inferior goods

Answer 12

Products for which demand declines as income rises, demand curve shifts to the left

Question 13

Substitute goods

Answer 13

Goods which will be bought as an alternative of another good

Question 14

Complementary goods

Answer 14

Goods which are typically consumed together

Question 15

Change in demand

Answer 15

A change which occurs when one or more of the determinants of demand changes, shown as a shift of the entire curve

Question 16

Change in quantity demanded

Answer 16

Change which occurs when the price of the product changes, shown as a movement along an existing demand curve

Question 17

Horizontal summation

Answer 17

Process of adding the number of units of the product purchased or supplied at each price to determine market demand or supply

Question 18

Supply

Answer 18

The maximum amount of a product that sellers are willing and able to provide for sale at various prices (+ Ceteris paribus)

Question 19

Law of supply

Answer 19

Higher prices will lead producers to offer more of their product for sale. The higher the price, the greater the potential for higher profits. Positive relationship

Question 20

The determinants of supply:

Answer 20

• production technologies
• cost of resources
• prices of related commodities
• expectations about future prices
• number of sellers in the market
• taxes and subsidies

Question 21

Where will shift the supply curve if the taxes increase?

Answer 21

To the left

Question 22

Where will shift the supply curve if the subsidies increase?

Answer 22

To the right

Question 23

Change in supply

Answer 23

Occurs when one or more of the determinants of the supply change, causing a shift in the entire supply curve

Question 24

Change in quantity supplied

Answer 24

Occurs when the price of the product changes - movement along an existing supply curve

Question 25

Equilibrium

Answer 25

The amount of the product that consumers want and are able to purchase is matched by the amount that producers can sell (is determined by the supply and demand)

Question 26

Equilibrium price (market clearing price)

Answer 26

The price at which the quantity demanded is equal to the quantity supplied

Question 27

Equilibrium quantity

Answer 27

The output that results when the quantity demanded is equal to the quantity supplied

Question 28

Surplus

Answer 28

Phenomenon which occurs when the price is above market equilibrium and quantity supplied exceeds quantity demanded. Markets may reduce prices

Question 29

Shortage

Answer 29

Phenomenon which occurs when the price is below the marker equilibrium and quantity demanded exceeds quantity supplied