Supply and Demand Flashcards
Define Demand
Demand is the amount of a good that will be bought at given prices over a period of time.
Define price
Price is the amount of money for which goods are exchanged in a transaction.
Some goods, such as property, antiques and works of art, are sold at auctions. This is where buyers bid against each other to buy goods. The person who makes the highest bid wins the right to buy the goods.
How are prices determined in the market described above?
Prices are determined by the forces of supply and demand. In this market, demand is represented by buyers who make bids for the goods on sale. The highest bidder takes the goods, and the final bid represents the price paid. The people who are selling the ‘Lots’ are the suppliers.
Explain how the market system allocates a nation’s resources?
The market system can help to allocate a nations’ resources. Resources, such as machinery, tools, workers and raw materials, flow from declining markets where prices are falling into thriving markets where prices are rising. Business will move into thriving markets because they have a better chance of making a profit there.
Why does the demand curve slope down from left to right?
The demand curve always slope down from left to right. This is because price and quantity demanded are inversely related. This means that when the price rise demand will fall, and when prices fall demand will rise.
Assess the effect of an ageing population on the firms in an economy.
If a country has an aging population there will be a higher proportion of retired people. This means there will be fewer people who are able to work, which could reduce the supply of labour. As a result, wages could be driven up if there are shortages of workers in certain markets. This increase in wages would raise business costs, which could lead to higher prices or lower profits. However, firms may decide to replace labour with capital. This could improve the efficiency of firms.
Firms may also find that demand patterns change. For example the demand for goods associated with children and young people, such as toys, might fall. In contrast, the demand for goods associated with a more mature population, such as cruises or electric wheelchairs, might rise. Firms will have to adapt to such changes. Finally, the government can help to overcome the problem of worker shortages by raising the retirement age or encouraging the immigration of working-age people.
Explain the likely effect of poor harvest on the price of apple in the US.
The poor apple harvest in the US will reduce supply. This shortage is likely to drive up the prices of apples because there will not be enough to satisfy demand. Shortage of products nearly always result in higher prices.
Explain the effect of a subsidy to apple growers on the supply of apples in teh US?
A subsidy given to apple growers in the US will help to reduce their costs. As a result, they are likely to increase supply. This is because lower costs should increase profit. Therefore, apple growers will produce more in an effort to make more profit.
Define price elasticity of demand.
Price elasticity of demand measures the responsiveness of the quantity demanded to a change in the price of a product.
Explain two reasons why demand for a product might be elastic.
- Demand for a product is likely to be elastic if there are several substitutes for that product. This means that consumers can switch easily to an alternative if the price of the product rises.
- Demand might also be elastic if a product is non-essential. Consumers can do without luxury goods, for example, if their price rises.
Explain the value of price elasticity of supply = 0
If the price elasticity of supply is zero, it means that supply is perfectly inelastic. Consequently, if there is a change in price there will not be any change in the quantity supplied. This is because supply is fixed and producers are not able to respond to price increases by supplying more to the market. The supply of wheat an example. The supply of wheat cannot be increased quickly, because it takes about a year for farmers to grow more wheat.
A product has elastic supply. Explain one reason why this might be the case.
Generally, if the supply of a product can be increased quickly, its supply will be price elastic. A firm can increase supply quickly if it can hold stocks of its output. For example if a bicycle manufacturer holds thousands of finished bicycles in a warehouse, it can respond to rising prices in the market (caused by a sudden increase in demand) effectively. This means it can increase supply quickly by releasing stocks immediately. Consequently, the supply is price elastic, since the firm is responding quickly to a price change.
Define income elasticity of demand.
Income elasticity of demand measures the responsiveness of demand to a change in income.
Demand for the luxury cars is income elastic. Do you agree with this statement? Give reasons for your answer.
Demand for luxury cars, like the Porsche, is likely to be income elastic. This means that a change in income will result in a more than proportionate change in demand. For example, as incomes rise the demand for sports cars is also likely to rise. Indeed, it could be argued that the demand for Porsche cars is very income elastic. People can only really afford to buy a Porsche if their incomes have risen to very high levels—way in excess of the average income in most countries. There is no reason to believe that the demand for luxury products, such the Porsche, is not income elastic. Income elasticity is positive, which shows that sports cars are normal goods.
ZingCo produces a range of textile products in Binhai Industry Park, China. To what extent might income elasticity of demand be helpful to a firm like ZingCo? Give reasons for your answer.
Income elasticity shows how responsive demand is to changes in income. ZingCo produce clothes which might be regarded as income elastic. Therefore, if incomes rise ZingCo might need to increase production. If firms like ZingCo can measure the value of income elasticity, they may predict how much production will have to be increased, given a certain increase in income. Also, ZingCo can produce a range of garments in its factory. This suggests that it has quite flexible resources and can switch production from one garment to another. A rise in incomes may encourage ZingCo to make more expensive garments, assuming that the demand for them is more income elastic. However, estimating the value of income elasticity may not be easy and if the value is overestimated, for example, ZingCo might produce too much stock. This could increase costs and lower profit for the firm, especially if they are left with unsold stock. So, income elasticity might only be helpful if accurate estimates can be made of its value.
What is shown by a production possibility curve?
A production possibility curve shows the different combinations of two goods that can be produced if all resources in a country are fully used.
Explain what is meant by the basic economic problem.
Countries have to solve the basic economic problem. The problem arises because a nation’s resources are scarce and the wants of the population are infinite. It involves deciding how to allocate a nation’s scarce resources between different uses. Three important questions have to be addressed by a nation’s decision makers when solving the problem—What to produce? How to produce? and For whom to produce?
Explain the effects of opportunity cost on a business.
Businesses have to make a choice about how to use their resources. For example, a supermarket chain may have a limited budget of £10m for investment. It may have to choose between (in order of preference) 1 Opening a new store, 2 Re-training managers, or 3 Setting up an online service. A sacrifice has to be made when making such a choice. This is called the opportunity cost. For example, if the new store is opened, the opportunity cost will be the benefit lost from the next best alternative, that is, the benefit lost from not re-training managers.
The private sector should produce all of the goods and services in the economy. Do you agree with this statement? Give reasons for your answer.
In the private sector, goods are produced by profit-making firms. Firms are more likely to make a profit if they can meet consumers’ needs. However, competition between firms ensures that firms only survive if they produce high-quality goods at fair prices. Those firms that produce poor-quality goods will lose customers to their superior rivals and may go out of business. This ensures that a nation’s resources are used efficiently. However, sometimes private sector production results in market failure. The production of certain goods may be neglected by the private sector. For example private sector firms may not produce sufficient schools and hospitals. They may also choose not to provide policing and defence. As a result, consumers may not have access to these important services. Such market failure suggests that the public sector has an important role to play and that the private sector should not be left to provide for all of society’s needs.
Botswana has a mixed economy. Identify two characteristics of a mixed economy.
- Goods are produced by both private and the public sector.
- Market failure can exist in a mixed economy.
With reference to total revenue, explain what is meant by a price inelastic demand curve. (4 marks)
Edexcel Question paper, May 2012
If a product has an inelastic demand curve, then a price change will result in less than proportionate change in the quantity demanded. This means that a price increase will lead to a less than proportionate fall in the quantity demanded. As a result, a price increase will raise total revenue. In constrast, a price cut will reduce total revenue. This is because when demand is price inelastic, total revenue will move in the same direction as the price change.
