Supply and Demand

Question 1

When should a Consumer Consume?

Answer 1

• If MB(q)>P

Question 2

What is the Law of Demand and what are the two mechanisms?

Answer 2

• As Price increases, Quantity Demanded decreases.
• The two mechanisms are consumers consume less and the fact that there are less consumers

Question 3

When should a Supplier Supply?

Answer 3

• If P>MC(q)

Question 4

What is the Law of Supply and what are the two mechanism

Answer 4

• As Price increases, so too does Quantity Supplied
• The two mechanisms are the Marginal Cost increasing as more production and producers are attracted to the sector

Question 5

Explain Vertical Interpretation

Answer 5

• Consumers are actually willing to pay a higher price
• Producers are actually willing to supply at a lower price
• Agreeing a price to trade benefits both until Q* units are traded

Question 6

Name the Determinants of Demand

Answer 6

• Substitute and Complimentary Goods
• Population changes
• Income changes
• Tastes and Preferences
• Expected Future Prices

Question 7

Name the determinants of Supply

Answer 7

• Subsidies and Taxation
• Cost of Production
• Expected future Prices
• Number of Firms
• Technological Advances

Question 8

What kind of efficiency is the Equilibrium point?

Answer 8

• Paretoly Efficient
• However, Pareto efficiency is not always the fairest distribution of resources

Question 9

Name 2 Pros of a Price Floor

Answer 9

• Reduces the consumption of demerit goods
• Ensures that consumers aren’t harmed by price changes
• Internalised Externality
• Allocative efficiency and societal gain

Question 10

Name 2 Cons of a Price Floor

Answer 10

• Regressive nature, increasing the income inequality
• Alternative suppliers cause black markets and smuggling from abroad
• Government loses out as there is a loss in tax revenue
• Unintended consequences of buying surpluses, leading to Government Failure
• Inelastic good may not properly sort the market failure due to disproportionate fall in Qd

Question 11

What are some Evaluation Points about a Price Floor?

Answer 11

• PED of the good
• Government failure arguments
• Policy used in compound, what else can be used?
• Has to be set at the right level

Question 12

Name 2 Pros of a Price Ceiling

Answer 12

• Encouraging more consumption of a merit good
• Helps people get necessities

Question 13

Name 2 Cons of a Price Ceiling

Answer 13

• Creates a shortage due to excess demand
• No thought for people who cannot obtain this good
• Government failure
• Unintended consequences such as black markets
• Cost of enforcing the Maximum Price

Question 14

What are some Evaluation Points about a Price Ceiling?

Answer 14

• Government Failure arguments
• Policy used in compound, what else can be used?
• Has to be set at the right level