Supply, demand and Equilibrium

Question 1

Effect of changes in S on market equilibrium

Answer 1

Supply falls = curve shift to the left, disequilibrium, a shortage
Supply rise = curve shift to the right, disequilibrium, a surplus

Question 2

Sequence of events as market moves position

Answer 2

1. Market in original position
2. Non price factor disturbs, curve (s/d) shifts from point 1-2
3. Now a surplus/shortage at price 1
4. Producer discount/raise price to eliminate s/s
5. (Say price is falling) producers contract quantity supplied, some consumers return to the market, expanding q demanded
6. Process continues until surplus/ shortage disappears and a new equilibrium reached at P2,Q2

Question 3

Effect of changes in demand on market equilibrium

Answer 3

Demand falls = d curve shift to the left, creates disequilibrium, a surplus
Demand rises = d curve shift to he right, creates disequilibrium, a shortage

Question 4

Law of demand

Answer 4

The higher the price the less quantity demanded, the lower the price the higher the quantity demanded

Question 5

Demand always downward sloping to the right bc

Answer 5

Of the law of demand that states demand has an inverse relationship to price

Question 6

Substitution effect

A factor effecting strength of demand

Answer 6

When the price of one good rises, other goods become more attractive to buyers because they are relatively cheaper. A rise in price will drive consumers to switch to relatively cheaper subs should they offer the same level of satisfaction, eg. in principle coffee and tea

Question 7

Income effect

A factor effecting strength of demand

Answer 7

When the p of a good rises consumers are not willing to purchase as much of the good because their real income/purchasing power has decreased
Eg. Price of pizza pie

Question 8

The inverse relationship between price and quantity is due to

Answer 8

consumers making rational choices following the law of demand, the higher the price the less demanded to protect real income

Question 9

Individual demand

Answer 9

Refers to q of a product demanded by an individual consumer at any given price
A consumer will demand a product of the benefit they expect to receive from the product is equal to or greater than the price they must pay
Thus increasing consumer surplus

Question 10

Market demand

Answer 10

Includes the individual demand of all the participants in a market
Simply the horizontal (add everyone up) of individual demand curves

Question 11

Factors effecting demand

Answer 11

Price (movement along the demand curve)
Non price factors (shifts in demand)
Income (levels of disposable income)
Population (demographic factors- ages with different demands, % of those people in an area)
Tastes and preferences (fashion, new information)
Price of substitutes (coffee and tea) and compliments (accessories to technology also required when purchased)
Expected future prices (price rising so start hoarding)

Question 12

Expansion and contraction

Answer 12

Cause by price factors, movement along demand curve

Question 13

Increase and decrease in demand

Answer 13

Shifts of demand curve

Non-price factors

Question 14

Exceptions to the law of demand

Answer 14

Veblen goods
Griffen goods
Experience goods
Bandwagon goods

A rise in p appears to create an expansion in q demanded rather than a contraction

Question 15

Veblen goods

Answer 15

Value or benefit comes from exclusivity, ‘snob factor’,
Buyers undertake ‘conspicuous consumption’
Benefit comes from beings seen by others consuming a good
Higher the p, more exclusive, more benefit people get from being seen owning

Question 16

Griffen good

Answer 16

Inferior, stable goods
Demand rises as income falls
Eg. Ramen noodles
Take up a large share of a persons income, esp when incomes are low
Griffen saw in Ireland People have to rely on potatoes when they couldn’t afford superior alternatives as well

Question 17

Experience goods

Answer 17

Consumers facing information gap
Difficult to judge quality goods, eg. Which brand of LED TV is best
Make a choice in the assumption that there is a positive correlation between price and quantity

Question 18

Bandwagon effect

Answer 18

A change in p for share of a company may be seen as an indication of further price changes
A rational consumer may therefore increase demand to be well positioned for future rises in p
Similarly a fall, indication of further falls, sell before rather falls take place

Question 19

Law of supply

Answer 19

The higher the price the more will be supplied, the lower the price the less will be supplied

Question 20

Why a positive relationship between d and s

Answer 20

Because producers are profit driven they wish to maximise profit through a higher price margin, the more willing to increase quantity at a higher price

Question 21

Individual and market supply curves

Answer 21

The individual supply curves represents the supply provided from a single producer whereas the market supply curve demonstrated the supply from all producers in the market

Question 22

Factors effecting supply

Answer 22

Price
Cost of production 
Factors of production 
Expected future prices
Number of suppliers 
Technology

Question 23

Equilibrium is

Answer 23

Is the point that the market clears, where s and d meet

Question 24

If p is bellow equilibrium

Answer 24

There is excess demand
Consumers will have to compete for the product
Producers will raise p to max profit

Question 25

If p is above equilibrium

Answer 25

There is excess supply
Price is dropped to clear market
Consumers will benefit from discounts or special offers

Question 26

How does income effect demand

Answer 26

When income falls demand for most products fall as a consumers purchasing power has decreased

Question 27

Explain how population effects demand

Answer 27

If pop increases potentially increase in market to increase demand

Question 28

What factors effect the slope of the supply curve

Answer 28

Technical complexity (more complex, longer for new capacity)
Mobility of resources (ability and willingness to move to a new location)
Ability to hold stocks/inventories (perishable?)
Amount of unused capacity (spare capacity, can increase quickly)
Does supply rely on external factors (someone else on strike/ natural disaster)

Question 29

How do factors of production effect s curve

Answer 29

Fruit and vegetable store wanting to sell corn, cyclone tears them up, limiting ability to sell corn
Firms dependant on supply chain

Question 30

Tastes and preferences effect demand as

Answer 30

As fashion changes and new information is released it will likely impact a consumers choices, changing the demand curve

Question 31

Prices of substitutes and complements affecting demand

Answer 31

Substitutes- when the price falls that good becomes more attractive demand will fall for the original good
Complement- as price rises demand will fall for a product as its now become more expensive to own

Question 32

Expected future prices effect on demand

Answer 32

If expected to rise people may hoard, temporary increase in demand, in order to ‘be safe’ from price changes

Question 33

Explain the link between PED and revenue

Answer 33

R= P*Q
When inelastic, change in Q demanded is small so limited impact on revenue
Elastic, large change in Q demanded, large impact on revenue

Question 34

Revenue box

Answer 34

Continent way of showing revenue/ consumer outlay at different points on a demand curve
Calculated by Q*P