Topic 2 - Demand and Supply

Question 1

What is demand?

Answer 1

The different quantities that consumers are willing and able to buy at different prices.

Question 2

What is the Law of Demand?

Answer 2

Negative relationship between price and quantity demanded.

Question 3

What are the non-price determinants of demand?

Answer 3

Income, tastes and preferences, future price expectations, price of related goods, number of consumers.

Question 4

What is a normal good?

Answer 4

A good for which demand increases as income increases.

Question 5

What is an inferior good?

Answer 5

A good for which demand decreases as income increases.

Question 6

What is supply?

Answer 6

The different quantities that producers are willing and able to sell at different prices.

Question 7

What are the non-price determinants of supply?

Answer 7

Costs of factors of production, technology, prices, producer price expectation, government intervention, number of firms, shocks.

Question 8

What is the Law of Supply?

Answer 8

Positive relationship between price and quantity supplied.

Question 9

What is elasticity?

Answer 9

Measures the responsiveness of a variable as a result of a change in another variable.

Question 10

What is Price Elasticity of Demand (PED)?

Answer 10

Measures the responsiveness of the quantity demanded of a good as a result of a change in price.

Question 11

What does PED > 1 indicate?

Answer 11

Demand is elastic.

Question 12

What does PED < 1 indicate?

Answer 12

Demand is inelastic.

Question 13

What does PED = 1 indicate?

Answer 13

Demand is unit elastic.

Question 14

What does PED = 0 indicate?

Answer 14

Demand is perfectly inelastic.

Question 15

How is Price Elasticity of Demand calculated?

Answer 15

% change in Qd / % change in P.

Question 16

What are the determinants of PED?

Answer 16

SPLAT: Substitute goods, proportion of income spent, luxury vs. necessity, addiction, time to respond.

Question 17

What is the Total Revenue Test for PED?

Answer 17

PED > 1: Price falls, total revenue increases; Price increases, total revenue decreases. PED < 1: Price falls, total revenue falls; Price increases, total revenue increases.

Question 18

What is Price Elasticity of Supply (PES)?

Answer 18

Measures the responsiveness of the quantity supplied of a good as a result of its change in price.

Question 19

What does PES > 1 indicate?

Answer 19

Supply is elastic.

Question 20

What does PES < 1 indicate?

Answer 20

Supply is inelastic.

Question 21

What does PES = 1 indicate?

Answer 21

Supply is unit elastic.

Question 22

What does PES = 0 indicate?

Answer 22

Supply is perfectly inelastic.

Question 23

What are the determinants of PES?

Answer 23

FASTR: Factors of production mobility, ability to store stocks, spare capacity of firms, time to adjust, rate at which costs increase.

Question 24

What is Income Elasticity (YED)?

Answer 24

Measures the responsiveness of the quantity demanded of a good to a change in income.

Question 25

How is YED calculated?

Answer 25

YED = % change of Qd / % change in Income.

Question 26

What does YED > 0 indicate?

Answer 26

Normal good.

Question 27

What does YED < 0 indicate?

Answer 27

Inferior good.

Question 28

What is Cross Price Elasticity (XED)?

Answer 28

Measures the responsiveness of the quantity demanded of a good to a change in the price of different goods.

Question 29

How is XED calculated?

Answer 29

XED = % Change in Qd of Good A / % change in price of Good B.

Question 30

What does XED > 0 indicate?

Answer 30

Substitutes.

Question 31

What does XED < 0 indicate?

Answer 31

Complements.

Question 32

What is consumer surplus?

Answer 32

Difference between what a consumer is willing to pay and what they actually paid for a product.

Question 33

What is producer surplus?

Answer 33

Difference between the market price and the lowest price a producer is willing to accept to produce a good.

Question 34

What is deadweight loss?

Answer 34

Lost efficiency when the socially optimal quantity is not being produced.

Question 35

What is the Double Shift Rule?

Answer 35

When two curves shift at the same time, either price or quantity will be indetermined.

Question 36

What are price controls?

Answer 36

Form of government intervention that sets a maximum or minimum price that producers can charge for certain goods or services.

Question 37

What is a price ceiling?

Answer 37

The legal maximum price set below the market equilibrium by the government for a good or service.

Question 38

What is a price floor?

Answer 38

The legal minimum price set above the market equilibrium by the government for a good or service.

Question 39

What happens if the price ceiling is set above equilibrium?

Answer 39

Nothing.

Question 40

What is an indirect tax?

Answer 40

Tax that is placed on the expenditure of a good or a service that is partially paid by the consumers but directly paid for by the producers to the government.

Question 41

What does YED > 1 indicate?

Answer 41

normal good - luxury good