Supply and Demand

Question 1

What do we assume about firms or seller

Answer 1

They aim to seek maximum profit

Question 2

What do we assume about households or consumers

Answer 2

They seek to gain maximum happiness or utility

Question 3

What is the formula for Profit which is denoted by pi

Answer 3

Pi = TR (total revenue) - TC (total cost)
TR = unit price x quantity

Question 4

What is the law of demand

Answer 4

A the quantity demanded increases the price decreases

Question 5

Describe why the law of demand is true

Answer 5

Income effect - something gets more expensive and must be brought then you get poorer as you are using more income on the same thing
Substitution effect - as one thing gets more expensive a rival product is chosen as it is now cheaper

Question 6

What makes the demand curve shift

Answer 6

Decrease in demand shift to the left
Increase in demand shifts to the right

Question 7

List the causes of a shift in demand

Answer 7

Income rising means people are more willing to pay for stuff
Price of a substitute rising will shift the curve right
Price of a complement rising shifts left
If tastes change and a product becomes more desirable the curve shifts right

Question 8

What is law of supply

Answer 8

The quantity supplied increases as the price increases

Question 9

What makes the supply curve shift

Answer 9

Decrease in supply shifts curve left
Increase in supply shifts curve right

Question 10

What are some causes of shift in supply

Answer 10

Input prices - shifts left if the minimum price sellers are willing to accept increases
Technology - shifts right when technology means products can be made cheaper
Random shocks - shifts to the left if there is an unpredictable shortage
Number of sellers - shifts right as more sellers means more can be produced at a given price