Theme 2.1.1 - The Interaction Of Demand And Supply

Question 1

Demand

Answer 1

Demand is the quantity of a good that consumers are willing and able to purchase at any price level, ceteris paribus

Question 2

Law of demand

Answer 2

The law of demand states that when the price of a good rises, its quantity demanded will fall and vice versa, ceteris paribus

Question 3

Law of diminishing marginal utility

Answer 3

The law of diminishing marginal utility states that beyond a certain point of consumption, as more and more units of the good or service are consumed, the additional utility a consumer derives from consuming successive units decreases

Question 4

Normal good

Answer 4

A normal good is a good whose demand rises as people’s incomes rise, ceteris paribus

Question 5

Necessity good

Answer 5

A necessity good is a good whose demand increases less than proportionately for a given increase in people’s incomes, ceteris paribus

Question 6

Luxury good

Answer 6

A luxury good is a good whose demand increases more than proportionately for a given increase in people’s incomes, ceteris paribus

Question 7

Inferior good

Answer 7

An inferior good is a good whose demand falls as people’s incomes rise, ceteris paribus

Question 8

Substitutes

Answer 8

Substitutes are goods which are considered to be alternatives to each other

Question 9

Complements

Answer 9

Complements are goods that when consumed together, gives rise to a higher combined utility than if the goods were consumed individually

Question 10

Derived demand

Answer 10

Derived demand is the demand for goods which are not demanded for its own sake but used to facilitate the production of another

Question 11

Supply

Answer 11

Supply is the quantity of a good that producers are willing and able to sell at every price level, ceteris paribus

Question 12

Law of supply

Answer 12

The law of supply states that when the price of a good rises, its quantity supplied will rise and vice versa, ceteris paribus

Question 13

Joint supply

Answer 13

Goods are in joint supply when the production of one good leads to the production of another good

Question 14

Competitive supply

Answer 14

Goods in competitive supply compete fo the use of the same inputs

Question 15

Price mechanism

Answer 15

The price mechanism describes the process by which consumers and producers interact to determine the allocation of scarce resources between competing uses

Question 16

Shortage

Answer 16

Shortage is a situation which exists at any price below the equilibrium price where quantity demanded exceeds quantity supplied

Question 17

Surplus

Answer 17

Surplus is a situation which exists at any price above the equilibrium price where quantity supplied exceeds quantity demanded