Supply and Demand

Question 1

What is demand?

Answer 1

It’s the quantity of a good/service consumers are willing to pay at a given price in a period of time.

Question 2

What is derived demand?

Answer 2

It’s the demand for a factor of production used to produce another good/service.

Question 3

What is the law of demand?

Answer 3

It’s the inverse relationship between the price of a good and its demand.

Question 4

The income effect?

Answer 4

When the price of a good falls, the consumer can maintain consumption for less increasing real income

Question 5

What is the substitution effect?

Answer 5

When the price of a good falls, ceteris paribus, the quantity demanded increases.

Question 6

What factors shift the demand curve?

Answer 6

-Changing prices of a substitute good
- Changing price of complementary goods
- Changes in real income
- Advertising and marketing
- interest rates

Question 7

What is joint demand?

Answer 7

It’s when demand for one product is positively related to demand for a good/service.

Question 8

What are examples of joint demand?

Answer 8

• Fish and chips
• Apps for phones

Question 9

What is composite demand?

Answer 9

It’s where goods have more than one use so an increase in demand for on product leads to a fall in supply of the other.

Question 10

What are examples of composite demand?

Answer 10

• Milk which is used for cheese, yogurt and butter
• Land which is used for housing, farming or offices

Question 11

What is derived demand?

Answer 11

It’s the demand for a good which is necessary for the production of another good.

Question 12

What are examples of derived demand?

Answer 12

• Car and engine
• Steel and buildings

Question 13

What is supply?

Answer 13

It’s the quantity of a good/service producers are willing and able to supply at a given price in a period of time.

Question 14

What is the law of supply?

Answer 14

As price rises of a good/service, firms expand supply due to a profit incentive.

Question 15

Why is there a positive relationship between market price and quantity supplied?

Answer 15

• Profit motive = When prices rise after an increase in demand, it becomes profitable for businesses to increase output.
• Production and costs = When output expands, a firms costs increases therefore a higher price is needed.
• New entrants into market = Higher prices create incentive for other businesses to enter the market .

Question 16

What are the factors causing a shift in supply?

Answer 16

• Changes in production costs
• Changes in technology
• Gov taxes and subsidies
• Change in price of a substitute
• No. of producers in a market

Question 17

Analyse changes in production costs

Answer 17

• Lower costs of production is passed through the supply chain resulting in lower prices, businesses can supply more at each price.
• Higher costs of production results in businesses not being able to supply as much at the same price.
• A fall in the exchange rate causes an increase in prices of imported goods causing a decrease in supply.

Question 18

Analyse gov taxes and subsidies

Answer 18

• Indirect taxes cause an increase in production costs
• Subsidies cause a fall in supply costs

Question 19

Analyse no. of producers in market

Answer 19

• When new businesses enter the market, supply increases causing downward pressure on price.
• If existing businesses decide to move away from profits towards a higher share of the market, the total supply available at each price will increase.