the interaction of demand and supply chapter 10

Question 1

equilibrium

Answer 1

situation where there is no tendency to change in a market. the quantity supplied equals the quantity demanded. The price mechanism ensures that the market ‘clears’. Equilibrium exists because the plans of consumers as represented by the market demand curve match the plans of suppliers as represented by the market supply curve. In other words, consumers and suppliers are satisfied with the present situation.

Question 2

disequilibrium

Answer 2

situation where demand and supply are not equal in a market. Markets are not always in equilibrium. Real-world markets are invariably in disequilibrium. It is usual for there to be excess supply or excess demand in a market. A key feature of the market mechanism is that it adjusts supply or demand to reach the equilibrium position.

Question 3

equilibrium price

Answer 3

the price where demand and supply are equal, where the market clears.

Question 4

equilibrium price

Answer 4

the amount that is traded at the equilibrium price.

Question 5

market adjustment

Answer 5

change in market parameters or conditions brought about in response to one or more market signals (including price changes from shifts in supply and demand). These changes are typically characterized as cycles, fluctuations, or trends. may not happen instantly. there will be time lags. market may stay in disequilibrium for a long time. market can move back into equilibrium because of underlying motives and plans of consumers and suppliers driving it

Question 6

what influences the speed of adjustment in the market

Answer 6

how long it takes consumer and producers to make the price they are prepared to pay or sell a product when the market is in disequilibrium.

Question 7

changes in demand (or supply)

Answer 7

when there is a shift in the demand (supply) curve due to a change in factors other than the price of the product. changes occur due to non price factors; the result is an increase

Question 8

shifts in the market demand curve

Answer 8

changes in these factors other than price are shown by shifts in the demand curve. a rightward sift indicates an increase in demand; a leftward shift indicates a decrease in demand.

Question 9

causes of shifts in the demand curve

Answer 9

the income/ability to pay for a product
the price and availability of substitutes and complements
fashion, taste and attitudes.

Question 10

how does income/ability to pay affect shifts in the demand curve

Answer 10

an individuals income and the availability of loans or credit and the interest rate that must be paid on loans or credit card balances. an increase in a purchasers income generally leads to increase in demand. a decrease in the ability to pay could lead to an increase on demand, this is the case for inferior goods.

Question 11

how does price and availability affect shifts in the demand curve

Answer 11

In the case of substitute products, a change in the price, availability and even the attractiveness of one product will have an impact on the demand for all of its substitute goods. It will shift to the right if the price of substitutes increases or if there is a positive report in the media of the health benefits of the product.
For complements, a rise in the price of one product will reduce the quantity demanded for it and its associated product. Equally, a fall in price of a product will lead to an increase in the quantity demanded and will also lead to an increase in demand for its complement. The outcome for both situations is a shift to the right of the demand curve.

Question 12

how does fashion, state and attitudes affect shifts in the demand curve

Answer 12

People buy products for a reason: an individual’s behavior is purposefully motivated, at least at the time of purchase. Economists usually consider behavior to be a reflection of their tastes and preferences towards different types of goods and services.

Question 13

shifts in market supply

Answer 13

Changes in the supply conditions can be shown by shifts in the supply curve. A rightward shift indicates an increase in supply: a leftward shift indicates a decrease in supply. Once again, notice a difference between a shift and a movement. A shift in the whole curve represents a change in supply rather than a change in the quantity supplied (which is shown by a movement along the curve).

Question 14

causes of shifts in the supply curve

Answer 14

the costs associated with supplying the product
changes in the prices of other products
the size and nature of the industry
government policy.

Question 15

how does costs associated with supply affect supply curve

Answer 15

the factors that can cause an increase or a decrease in the costs of supplying each and every unit, since it is likely that this will impact on the price that firms charge. if any factor pushes up costs, there is likely to be a leftward shift in the supply curve or a decrease in supply; if the factor lowers costs, there is likely to be an increase in supply:

Question 16

how does changes in prices of other products affect supply curve

Answer 16

In the case of manufactured goods particularly and for any producer, the supply of products onto the market can be determined by the actions of competitors. an increase in the price of a similar product from a competitor should increase sales and supply from another firm that has left price unchanged.

Question 17

how does the size and nature of the industry affect supply curve

Answer 17

If the size of the industry increases, because there are more firms or bigger firms, then it is likely that the supply curve of the industry will shift to the right. Equally, if firms in the industry start to compete more intensively on price, it is likely that the supply curve will shift to the right as the effects of this price competition start to affect the price that all firms are willing to accept for their products. Of course, if a price war breaks out, then consumers, at least temporarily, may enjoy much lower prices for any given level of supply.

Question 18

how does government policy affect supply curve

Answer 18

Legislation designed to protect consumers or workers may impose additional costs on companies. Governments may also impose a specific tax such as excise duties on the output of firms or an ad valorem tax on particular goods and services. The impact of tax is like a cost increase because firms may seek to pass the tax on to the consumer in the form of higher prices. As such, indirect taxes often result in a decrease in supply. On the other hand, a relaxation of certain types of legislation or government subsidies can increase supply by encouraging firms to reduce prices for any given level of output

Question 19

excise duties

Answer 19

a specific tax that is levied on goods

Question 20

ad valorem tax

Answer 20

a tax that is charged as a given percentage of the price

Question 21

change in supply and demand

Answer 21

In many situations, the conditions of both supply and demand may change simultaneously. The increase in demand for the product. puts upward pressure on price. However, the simultaneous increase in supply puts downward pressure on price. The resulting effect is that the equilibrium price remains unchanged, although of course there is a fairly significant increase in the quantity traded.

Question 22

alternative demand and relationship between markets

Answer 22

A rise in price of one product will lead to an increase in demand and a rise in price of the substitute product.

Question 23

joint demand and relationship between markets

Answer 23

Here, an increase in supply will see the price of one product fall prompting an increase in demand for the complement

Question 24

joint supply and relationship between markets

Answer 24

when two items are produced together but for different purposes

Question 25

derived demand and relationship between markets

Answer 25

where the demand for a good or service depends upon the use that can be made from it.

Question 26

rationing and relationship between markets

Answer 26

where a producer limits the supply of products in the market to ensure the products remain exclusive. exclusive products are likely to have a high price. Demand is limited and ensures that it is in line with the quantity supplied to the market.

Question 27

signaling of preferences and relationship between markets

Answer 27

A rise in the quantity demanded results in an increase in price, signaling to producers that they should put more of their products onto the market. In turn, if consumers withhold their demand, prices can be expected to fall. This signals to producers that less should be produced. The price mechanism works in such a way that the outcome is a new equilibrium position with consumers’ demand equal to producers’ supply.

Question 28

transmission of preferences and relationship between markets

Answer 28

If consumers do not buy a particular product because it is not liked or it is too expensive, then the message is transmitted back to producers. If they wish to stay in business, producers should react by either improving the product, reducing its price or both.

Question 29

signaling

Answer 29

where decisions taken by buyers or sellers are determined by price.

Question 30

transmission of preferences

Answer 30

the automatic way in which the market allows the wants of consumers to be made known to producers.

Question 31

the provision of incentive and relationship between markets

Answer 31

Low prices and special offers such as discounts generally encourage consumers to buy more goods. This is because consumers get more satisfaction from consuming a product when they think they are getting a good deal.
Higher prices can stop consumers purchasing a good; however, they can encourage suppliers to produce more for the market in a way that low prices can discourage their willingness to supply. If low prices persist, suppliers may well decide to exit a market.

Question 32

incentive

Answer 32

where low or high prices influence consumption and production by encouraging buyers to consume and sellers to produce.