supply, demand, equilibrium

Question 1

Demand

Answer 1

-Quantity of a good or service that consumers are willing and able to buy at a given price and time period
-High price=low demand (demand slope contracts)

-FACTORS AFFECTING DEMAND:
-Population size
-Income
-Related goods
-Advertising
-Tastes/preferences
-Expectations
-Seasons

TYPES OF DEMAND:
-Derived demand- demand for one good is linked to the demand for another (demand for labour is derived from demand for goods and services)
-Composite demand- a good has more than one use for it (milk can produce both butter and cheese)
-Joint demand- goods are complementary
-Effective- willing and able to buy
-Potential-willing but not able

Question 2

Why is the demand curve downward sloping?

Answer 2

-inverse relationship between price and quantity
-diminishing marginal utility- for each extra unit that is consumed, the benefit from consuming the good falls so consumers are less willing to pay high for the good- eventually the utility becomes zero

Question 3

Supply

Answer 3

-Quantity of a good/service that producers are willing and able to supply at a given price and time period

FACTORS AFFECTING SUPPLY:
-Productivity,productions costs
-Indirect taxes
-Number of firms
-Technology
-Weather
-Cartels

TYPES OF SUPPLY:
-Joint supply- product of a process can yield multiple outputs like a cow

Question 4

Why is the supply curve upward sloping?

Answer 4

-High price-incentive to supply a lot to increase profit (profit motive)
-New firms are encouraged to enter the market as it seems profitable
-Large outputs=high costs=high price

Question 5

Price mechanism

Answer 5

FUNCTION
-determines the market price
-resources are allocated
-price moves resources to where they are demanded/ where there is a shortage/removes resources from where there is a surplus

RATIONING:
-Price increases when there is a shortage
-Discourages demand
-Leaves only those with willingness and ability to buy

INCENTIVE:
-Through choices consumers send information to producers about their changing nature of needs and wants
- Rising prices produce incentive for producers to supply more and they receive higher profits

SIGNALLING:
-If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand.
-If there is excess supply in a market, the price mechanism will help to eliminate a surplus of a good by allowing the market price to fall.

-Niche markets more effective at allocating resources that mass markets

Question 6

Price determination

Answer 6

EQUILIBRIUM:
-Supply and demand are balanced
-Price has no tendency to change
-This is the market clearing price

EXCESS DEMAND:
-price is below equ. (disequilibrium)
-shortage pushes price up and rations resources
-firms are signalled to supply more so demand can contract

EXCESS SUPPLY
-price above equilibrium
-surplus
-firms lower price to encourage demand