TOPIC 2: DEMAND & SUPPLY

Question 1

[Definition] Ceteris paribus assumption

Answer 1

The ceteris paribus assumption states that other than the variable being studied, every other variable that could affect the outcome, remains constant.

Question 2

Assumptions of the Demand & Supply model

Answer 2

1. Individuals are rational
2. Large number of consumers and producers in market
3. Perfect factor mobility and perfect information
4. Private ownership of property
5. Freedom of choice and enterprise

Question 3

[Definition] Demand

Answer 3

The demand of a good refers to the quantity of the good that consumers are WILLING and ABLE to purchase at EVERY GIVEN PRICE over a GIVEN PERIOD OF TIME, ceteris paribus.

Question 4

Demand VS Quantity Demanded

Answer 4

Demand:
Qty that consumers are willing and able to purchase at EVERY GIVEN PRICE (aka the entire demand line)

Quantity demanded:
Qty that consumers are willing and able to purchase at A SINGLE GIVEN PRICE (aka a point along the quantity axis)

Question 5

Non-price determinants of demand

Answer 5

EGYP²T
E: Expectations of future changes in (Prices & Income)
G: Government policies (Direct tax, Subsidies, Public Education)
Y: Income
P²:
- Population
- Prices of related goods (substitute, complement, derived demand aka FOP)
T: Taste and preferences

Question 6

[Definition] Supply

Answer 6

The supply of a good refers to the quantity of the good that producers are WILLING and ABLE to produce at EVERY GIVEN PRICE over a GIVEN PERIOD OF TIME, ceteris paribus.

Question 7

Supply VS Quantity Supplied

Answer 7

Supply:
Qty that producers are willing and able to produce at EVERY GIVEN PRICE (aka the entire supply line)

Quantity demanded:
Qty that producers are willing and able to produce at A SINGLE GIVEN PRICE (aka a point along the quantity axis)

Question 8

Non-price determinants of supply

Answer 8

WETPIGS
W: Weather and season
E: Expectations of future prices
T: Technology
P: Price of related goods (competitive & joint supply)
I: Input prices
G: Government policies
- Indirect tax (specific tax & ad-valorem tax)
- Subsidies
S: Sellers (number of)

Question 9

Market Equilibrium

Answer 9

Market equilibrium occurs at the intersection of the demand and supply curve, whereby quantity demanded is exactly equal to quantity supplied at the equilibrium price. At this equilibrium, there is no tendency for the price and quantity to change.

Question 10

Price Adjustment Process (Shortage)

Answer 10

1. At price P₀, Qd > Qs (shortage)
2. Upwards pressure on prices
3. Qd decrease & Qs increase until Qd=Qs

Question 11

Price Adjustment Process (Surplus)

Answer 11

1. At price P₀, Qs > Qd (surplus)
2. Downwards pressure on prices
3. Qd increase & Qs decrease until Qd=Qs