Supply, Demand and the demand theory

Question 1

What is meant by the term Demand

Answer 1

Demand is the quantity of a good/service a consumer is willing and able to buy over a given time period at a given price

Question 2

What is stated by the Law of demand

Answer 2

The law of demand states that there is an inverse relationship between the price and quantity demanded explaining the downwards slope on the demand curve

Question 3

What effects explain the inverse relationship of the demand curve

Answer 3

The income effect
The substitution effect

Question 4

What is meant by the income effect

Answer 4

the income effect is When prices increase our paychecks cannot stretch as far (our purchasing power of our incomes falls) so we are less willing and able to buy the same quantity of a good/ service as we could before

Question 5

What is meant by the substitution effect

Answer 5

the substitution effect occurs when prices go up and alternatives become more price competitive leading to consumers switching their consumption to alternatives

Question 6

What are the determinants of demand?

Answer 6

1. Population
2. Advertising
3. Substitutes
4. Income
5. Fasion/tasye
6. Interest rates
7. Complements price

PASIFIC

Question 7

What are the determinants of elasticity of demand

Answer 7

1. Substitutes
2. percentage of income
3. Luxury/ necessity
4. Addictive
5. Time period

Question 8

What happens when price is elastic

Answer 8

Price increase results in a proportionally greater quantity demanded decrease

Price decrease causes a proportionally greater revenue increase

Question 9

What happens when price is inelastic

Answer 9

Price increases results in a proportionally greater revenue increase

Price decrease results in a proportionally less revenue increase

Question 10

What is meant by PED

Answer 10

PED is the responsiveness of quantity demanded given a change in price

Question 11

How do we calculate PED

Answer 11

%change in quantity/% change in price

Question 12

What is the elasticity if PED>1

Answer 12

elastic

Question 13

What is the elasticity if PED<1

Answer 13

inelastic

Question 14

What is the elasticity if PED=0

Answer 14

Perfectly price inelastic

Question 15

What is the elasticity if PED=infinity

Answer 15

Perfectly price elastic

Question 16

what happens if elasticity is +or- 1

Answer 16

Unitary price elastic

Question 17

what is meant by being “unitary price elastic”

Answer 17

When price is increased by x%
Demand falls by x% so revenue remains constant

Question 18

What is meant by YED

Answer 18

YED is the responsiveness of quantity demanded given a change in income in a given time period

Question 19

How do we calculate YED

Answer 19

% change in QD/ % change in income

Question 20

What does it mean if YED is positive

Answer 20

If YED is positive it means we have a normal good

Question 21

What does it mean if YED is negative

Answer 21

If YED is negative it means we have an inferior good

Question 22

What is meant by the term normal good

Answer 22

A normal good is when demand increases as incomes increase

Question 23

What is meant by an inferior good

Answer 23

An inferior good is when demand increases when income decreases

Question 24

What are the two types of normal good

Answer 24

1. Normal luxury
2. Normal necessity

Question 25

What is meant by a normal luxury

Answer 25

non essential high status items- As income rises demand rises proportionally greater- it is income elastic

Question 26

What is meant by a normal necessity

Answer 26

Essential items- As incomes rise demand rises proportionally less- it is income inelastic

Question 27

What does it mean when YED>1

Answer 27

The good is income elastic meaning it is a normal luxury

Question 28

What does it mean when YED<1

Answer 28

The good is income inelastic meaning it is a normal necessity

Question 29

What does it mean when YED>-1

Answer 29

Demand is income elastic and is an inferior good

Question 30

what does it mean when YED<-1

Answer 30

Demand is income inelastic and is an inferior good

Question 31

Give an example of an elastic inferior good's YED

Answer 31

-2 -3 -4 any number -(1+)

Question 32

Give an example of an inelastic inferior good's YED

Answer 32

any number below -0.99

Question 33

What is XED

Answer 33

Cross elasticity of demand measures the responsiveness of quantity demanded of a good/ service given a change in price of another good/ service

Question 34

How do we calculate XED

Answer 34

% change in qd of good A/ % change in price of good B

Question 35

What does it mean if XED is positive

Answer 35

It is a substitute good/ service

Question 36

What does it mean if XED is negative

Answer 36

It is a compliment good/ service

Question 37

What does it mean if XED>1

Answer 37

The good is price elastic meaning there is a strong relationship between them

Question 38

What does it mean if XED<1

Answer 38

The good is price inelastic meaning there s a weak relationship

Question 39

What does it mean if XED=0

Answer 39

No relationship (perfectly price inelastic)

Question 40

What is meant by supply

Answer 40

Supply is the quantity of a good/service that producers are willing and able to produce at a given time at a given price

Question 41

What does the Law of supply state

Answer 41

The law of supply states that there is a direct relationship between price and quantity supplied. As price increases quantity of supply also increases (CETERIS PARIBUS)

Question 42

An increase in price causes what movement on the supply curve

Answer 42

An extension in supply

Question 43

What are the determinants of supply

Answer 43

PINTS WC 1. Productivity 2. Indirect tax 3. Number of firms 4. Technology 5. Subsidy 6. Weather 7. Costs of production

Question 44

What is a subsidy?

Answer 44

A money grant given to producers by the government to increase production as it allows firms to operate at lower costs

Question 45

How might indirect TAX impact supply

Answer 45

It may reduce supply as it increases costs of production

Question 46

What is (PES)

Answer 46

The responsiveness of quantity supplied given a change in price at a given time

Question 47

PES is always positive. TRUE OR FALSE, explain your answer

Answer 47

False, PES is always negative due to the law of supply

Question 48

what is the elasticity of supply if PES>1

Answer 48

Supply is price elastic

Question 49

What is the elasticity of supply if PES<1

Answer 49

Supply is price inelastic

Question 50

WHat is the elasticity of supply if PES=0

Answer 50

Supply is perfectly price inelastic

Question 51

What is the elasticity of supply if PES=1

Answer 51

Supply is unitary elastic

Question 52

WHat is the elasticity of supply if PES= infinity

Answer 52

Supply is perfectly price elastic

Question 53

What are the determinants of elasticity of supply

Answer 53

Production Lag Stocks Spare capacity Substitutability of FOPS Time

Question 54

Why might time effect the elasticity of supply

Answer 54

Short time period- inelastic as there is one fixed FOP LOng time period- elastic as all FOPs are variable

Question 55

If the revenue of a product goes up when prices go up, what type of elasticity does it have

Answer 55

Inelastic demand

Question 56

If the revenue earned from a product falls when prices are raised, what type of elasticity does this product have?

Answer 56

Elastic demand

Question 57

What happens to the QD of an inelastic good when prices are increased

Answer 57

QD falls proportionally less

Question 58

What happens to the QD of an elastic good when prices are increased

Answer 58

QD proportionally greater

Question 59

Why might an inelastic product have a low sensitivity to price changes?

Answer 59

Few/ Fewer substitutes

Question 60

What is the relationship between substitutes and elasticity

Answer 60

As there are more substitutes, demand is more sensitive to a change in price- elasticity

Question 61

What does YFE stand for?

Answer 61

Output at full employment