Theme 1 Unit 2 - Supply + Demand

Question 1

What is demand

Answer 1

Quantity that consumers are willing and able to buy at a price

Question 2

What is utility

Answer 2

The enjoyment we get from consuming something, affects our individual demand

Question 3

What is effective demand

Answer 3

When the desire to buy is backed up by ability to pay

Question 4

What is derived demand

Answer 4

Demand for a good used to produce another good

Question 5

Examples of derived demand

Answer 5

Cars–> Steel

Businesses–> Labour

Question 6

What is the law of demand

Answer 6

As prices fall, there is an expansion of demand

As they rise, demand contracts

Question 7

Why is the law of demand so

Answer 7

The income effect:
Higher income –> More consumption at the same expenditure
The substitution effect:
If a good becomes relatively cheaper consumers will buy it more

Question 8

What causes shifts in the demand curve

Answer 8

Price change of substitutes
Price change of complements
Changes in real income
Changes in income distribution
Advertising
Seasonal factors

Question 9

What is total vs marginal utility

Answer 9

Total satisfaction from consumption

The satisfaction gained from consuming one more unit

Question 10

What is diminishing marginal utility

Answer 10

Decreasing utility gained from each additional unit of consumption
One reason for downward slope of demand curve

Question 11

What is the paradox of value

Answer 11

“diamond-water paradox”

Value in use is different to value in exchange

Question 12

Social/emotional factors affecting demand

Answer 12

Herd behaviour/ animal spirits - increasingly prevalent in the digital world
“hot” or “cold” states - affect short-term spending

Question 13

What is joint demand

Answer 13

When demand for good is dependent on another i.e. Ink and printers, coffee and coffee cups

Question 14

What is competitive demand

Answer 14

Different goods in competition for the same use i.e. pepsi and coke, meat and fish

Question 15

What is composite demand

Answer 15

When the same good can be use to produce 2 end goods i.e. oil to plastic or fuel

Question 16

What is supply

Answer 16

Quantity that producers are willing and able to sell at a price

Question 17

What is the law of supply

Answer 17

As the price rises, quantitiy supplied will expand (rise)

Question 18

Why is the law of supply so

Answer 18

The profit motive:
Higher price –> More profit/ incentive
Production costs:
More output –> higher costs –> higher price needed
New entrants:
Higher price –> Incentive for new entrants –> Higher total supply

Question 19

What causes an inward shift in the supply curve

Answer 19

Higher production costs
Fall in the exchange rate
Taxes/ regulation
Natural disaster/ bad weather
Rising price in substitute product
Exit of producers

Question 20

What causes an outward shift in the supply curve

Answer 20

Lower production costs
Rise in the exchange rate
Subsidies
Good harvest
Falling price in substitute product
Entry of producers/ focus on market share

Question 21

What is competitive supply

Answer 21

Different products a producer could make with factors of production i.e. crops to food or bio-fuel