Supply and Demand

Question 1

Market

Answer 1

A market is any place or situation where buyers and sellers or their agents make contact to negotiate prices and quantities of a good and service to be traded

Question 2

Law of demand

Answer 2

The empirical observation that when the price of a product falls, people demand larger quantities of it

Question 3

Law of supply

Answer 3

The empirical observation that when the price of a product rises, firms offer more of it for sale

Question 4

Real price of a product

Answer 4

Its price relative to other goods and services

Question 5

Factors that shifts the demand curve

Answer 5

• Income (Normal and inferior goods)
• Tastes
• Price of substitutes & compliments
• Expectations
• Population

Question 6

Determinants of demand

Answer 6

• Price
• Income (Normal and inferior goods)
• Tastes
• Price of substitutes & compliments
• Expectations
• Population

Question 7

Factors that shift the supply curve

Answer 7

• Technology
• Factor prices
• The number of suppliers
• Expectations
• Weather

Question 8

Determinants of supply

Answer 8

• Price
• Technology
• Factor prices
• The number of suppliers
• Expectations
• Weather

Question 9

Excess supply

Answer 9

The amount by which quantity supplied exceed quantity demanded at a specific price

Question 10

Excess demand

Answer 10

The amount by which quantity demanded exceeds quantity supplied at a specific price

Question 11

Welfare properties of equilibrium

Answer 11

If price and quantity take anything other than their equilibrium values it will always be possible to reallocate so as to make at least some people better off without harming others

Question 12

Consumer surplus

Answer 12

What the consumers pay less than they are willing to pay

Question 13

Producer surplus

Answer 13

What producers receive more than what they are willing to sell for

Question 14

Price supports / Price floor

Answer 14

• Minimum price for a good, established by law, and supported by government’s offer to buy the good at that price
• It requires the government to become an active buyer in the market
• Purpose of farm price supports is to ensure prices are high enough to provide adequate income for farmers

Question 15

Price ceiling

Answer 15

• Maximum level above which the price of a good is not permitted by law to rise
• Eg rent control ensure rich property owners do not exploit the poor, but the economic consequences are no less damaging

Question 16

Functions of price

Answer 16

• Rationing function

- Allocative function

Question 17

Rationing function of price

Answer 17

The process whereby price directs existing supplies of a product to the users who value it most

Question 18

Allocative function of price

Answer 18

The function whereby price acts as a signal that guides resources away from the production of goods whose price lie below cost to the production of goods whose prices exceed cost

Question 19

Effect of a level tax levied on the seller

Answer 19

• Add the tax to the price at each quantity supplied

- Shifts the Supply curve upwards

Question 20

Seller’s proportion of tax

Answer 20

Ts = (P0 - (P1 - T)) / T

Question 21

Buyer’s proportion of tax

Answer 21

Tb = (P1 - P0) / T

Question 22

Elasticity and tax levied on the seller

Answer 22

• The more inelastic the demand curve, the higher the proportion of the tax the producer pays
• The more elastic the demand curve, the higher the proportion of the tax the buyer pays

Question 23

Effect of a level tax levied on the buyer

Answer 23

• Add the tax to the price at each quantity demanded

- Shifts the Demand curve upwards