Topic 2 : Price determination in a competitive market. (demand and supply)

Question 1

Define ‘Demand’

Answer 1

Quantity of goods and services that consumers are willing and able to buy at each price.

Question 2

What is ‘Effective demand’

Answer 2

A household demand only becomes effective if individuals want (willing) the product and can afford (able) to buy it.

Question 3

Define ‘the law of demand’

Answer 3

Demand varies inversely with price - lower prices make products more affordable for consumers.

Question 4

Price changes………………….. shifts in the demand curve for a product.

Answer 4

do not cause

Question 5

What is an ‘normal’ good?

Answer 5

When income increases, demand increases. This is due to consumers now being able to afford to buy the product.

Question 6

What is an ‘Inferior’ good?

Answer 6

When income increases, demand decreases. This is due to consumers now being less willing to buy the product.

Question 7

Name all the factors that shift the demand curve.

Answer 7

1. Price of substitutes.
2. Price of complements.
3. Changes in season/weather.
4. Changes in fashion.
5. Gov legislation.
6. Real income of consumers.

Question 8

What’s the difference between a movement and a shift?

Answer 8

A ‘movement’ in the demand curve describes a change in the quantity demanded due to price variation, whereas a ‘shift’ refers to a change in the demand itself caused by non-price factors.

Question 9

Define ‘supply’

Answer 9

Quantity of goods and services that all firms in a particular market are willing and able to produce or sell at each price.

Question 10

Non-price factors cause a ………. in the supply curve.

Answer 10

Shift.

Question 11

Why does it slope upwards?

Answer 11

A higher price (P1 to P2) caused by the supply side factors - increased demands to a lead in the expansion (A to C) of quantity supplied Q1 to Q3). Producers willingness to produce more has increased (higher profit motive).

Question 12

If the price of a good / service increases, we ………. up the supply curve. (………………..)

Answer 12

1. Move
2. Movement

Question 13

If the price of a good / service decreases, we ……………. down the the supply curve. (Movement)

Answer 13

1. Move
2. Movement.

Question 14

What caused an inward shift of supply?

Answer 14

A decrease in supply at each market price. (Left)

Question 15

What causes an outward shift of supply?

Answer 15

An increase in supply at each market price. (Right)

Question 16

List the 7 factors that will shift the supply curve. (Non-price factors).

Answer 16

1. Productivity.
2. Indirect tax.
3. Number of firms.
4. Technology.
5. Subsidy.
6. Weather.
7. Cost of production.

Question 17

Key point when writing a paragraph. (Demand and supply).

Answer 17

1. Example / Quote from the extract.
2. Condition. (PINTSWC)
3. Ability or willingness?
4. Production. + / -
5. Increase/decrease in supply.
6. Shift. Right/Left.
7. Increase/Decrease quantity supplied Q1 to Q2.

Question 18

What is the law of diminishing marginal utility state?

Answer 18

The law of diminishing marginal utility states that as an extra unit of the good is
consumed, the marginal utility, i.e. the benefit derived from consuming the good,
falls. Therefore, consumers are willing to pay less for the good.

Question 19

Define “The price mechanism”

Answer 19

The interaction of buyers and sellers in free markets enables goods, services and resources to be allocated efficiently. relative prices, and price changes, reflect the forces of demand and supply and help solve the economic problem. resources moved towards where they are in the shortest supply, relative to demand, and away from where they are least demanded.

Question 20

What are the 4 functions of the price mechanism?

Answer 20

Allocate
Signalling
Incentives
Rationing
(ARSI)

Question 21

Define “Allocate”

Answer 21

allocating scarce resources among competing uses​.

Question 22

Define “Signalling”

Answer 22

prices adjust to demonstrate where resources are required, and where they are not​

Question 23

Define “Incentive”

Answer 23

e.g. when the price of a product rises, the quantity supplied increases as businesses respond!​

Question 24

Define “Rationing”

Answer 24

prices serve to ration scarce resources when market demand outstrips supply​

Question 25

Define “Joint demand - complements”

Answer 25

Joint demand is when the demand for one product is directly related to market demand for a related good or service. Two complements are said to be in joint demand and the cross-price elasticity of demand is NEGATIVE.

Question 26

Define “Competitive demand - substitutes”

Answer 26

Competitive demand is the demand for products that are competing for sales. People can substitute one competing product for another. If the demand for one product increases, the demand for its competitor will decrease.

Question 27

Define “Composite demand”

Answer 27

Composite demand exists where goods or services have more than one use so that an increase in the demand for one product leads to a fall in the supply of the other e.g. milk.

Question 28

Define “Derived Demand”

Answer 28

The demand for a product X might be strongly linked to the demand for a related product Y. For example, the demand for Intel chips is strongly linked to the market demand for new laptops.

Question 29

Define “Joint supply”

Answer 29

Joint supply refers to a product or process that can yield two or more outputs. Common examples occur within the livestock industry: cows can be utilised for milk, beef and hide; sheep can be utilised for meat, milk products, wool and sheepskin.