Topic Three - Markets: Demand and Supply

Question 1

What is a market?

Answer 1

A market is a situation where buyers and sellers come together for the purpose of exchange. This exchange is typically in the form of exchanging money in return for a good or service. Markets can be both online or physical

Question 2

What are product/goods and services markets?

Answer 2

Product or goods and services market refers to where and how final goods and services are bought and sold. Here, firms supply final output and receive a revenue in return

Question 3

What are two examples of a product/goods and services market?

Answer 3

An example is a market for fruit and vegetables, market for meat and fish.

Question 4

What are factor markets?

Answer 4

Factor markets refers to markets where factors of production are bought and sold (land, labour, capital, enterprise)

Question 5

What are some examples of factor markets?

Answer 5

Some examples include labour markets ( the place where workers and employees interact with each other. In the labour market, employers compete to hire the best, and the workers compete for the best satisfying job.)

capital markets (the part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments. I.e. NASDAQ)

market for raw material, market for management or entrepreneurial services.

Question 6

What is derived demand?

Answer 6

Derived demand arises from the interaction between product and factor markets. It refers to the demand for productive resources which is derived from demand for final goods and services or output

Question 7

How do factor and product/goods and services markets interact with each other to create derived demand?

Answer 7

The product market (selling of final goods and services) sends a message to businesses as to what the consumers want. From there, the factor markets are affected because the factor markets will sell factors of production which is the most relevant to what the consumers want. Thus resulting in derived demand

Question 8

What is an example of derived demand?

Answer 8

Consumer demand for new cars rises, thus the producers will up their demand for productive inputs or resources used to produce new cars

Question 9

What is the function of factor and product markets?

Answer 9

They both interact to determine equilibrium prices prices and quantities of the various goods,
services and resources bought and sold. Equilibrium refers to a market situation in which there is no tendency for change. When demand and supply are in equilibrium there is no tendency for the price
and quantity demanded or supplied to change.

In other words, economic equilibrium is a situation in which economic forces such as supply and demand are balanced

Question 10

How are markets equilibrating devices?

Answer 10

They determine what and how much is produced (according to consumer demand and resources), it also determines how output is produced (determined by resources and technology available) and also to whom final output is distributed (determined by income)

Question 11

What do markets discriminate against in market economies?

Answer 11

Markets discriminate in favour of those people who have the market income to pay for goods, services and resources.

They also discriminate in favour of people who are first in the market being prepared to pay for goods, services and resources.

Question 12

What are the 5 roles of prices in market economies? Give a brief description of each

Answer 12

Prices reflect relative scarcity of goods and services in terms of supply - A higher price will indicate that the goods and services are low in supply, and a low price will indicate that goods and services are relatively high in supply

Prices help to allocate resources - The resources are allocated to the production of the most profitable goods and services

Prices act as rationing devices - In other words, they allow markets to clear. For example, a surplus of goods
in a market will usually lead to a fall in price, to encourage demand and discourage production. Vice versa.

Prices are an equilibrating device - Changes in prices bring about equilibrium between demand and supply if they are in a disequilibrium situation such as a shortage or surplus of goods.

Prices act as incentives - Signals for producers and entrepreneurs to take risks in organising the
factors of production to produce the goods and services demanded by consumers.

Question 13

What is opportunity cost?

Answer 13

Refers to the cost of alternative consumption or production of a good or service forgone

Question 14

What are relative prices?

Answer 14

The price of a commodity such as a good or service in terms of another

Question 15

How do relative prices reflect opportunity cost, explain it in an example?

Answer 15

Take the example of a movie ticket costing three times less than a theatre ticket. Thus, the opportunity cost of purchasing a theatre ticket is three movie tickets whereas the opportunity cost of purchasing a movie ticket is 0.33 theatre tickets. Thus relative prices can reflect opportunity cost

The price differential between movie and
theatre tickets therefore helps to ration theatre tickets relative to movie tickets, and signals to consumers
the relative opportunity cost of consuming these two alternative or substitute services.

Question 16

What is demand?

Answer 16

Demand is the quantity of a commodity that will be bought at a given price in a given period of time.

Question 17

What is effective demand?

Answer 17

Effective demand is the willingness as well as ability to buy a product.

Question 18

How is effective demand and demand different?

Answer 18

Demand is the mere want or desire for a good whereas effective demand is both the desire for a good AND the ability to buy a product.

Question 19

What is individual demand?

Answer 19

Individual demand refers to that of a single buyer or household demanding a certain good or service.

Question 20

What is market demand?

Answer 20

Market demand is the total demand of a certain good or service. It is calculated through adding up all of the individual demands for a product

Question 21

What are 6 factors which affect the quantity demanded of any product by an individual consumer ?

Answer 21

Consumer tastes and preferences

Disposable income

Prices of other goods

Expectations

Technology

Credit

Question 22

How are consumer tastes and preferences affect the quantity demanded of a product?

Answer 22

What consumers think of products will be a big factor in demand because a person themselves determine the demand for a certain product. Tastes will vary from individual to individual. They are affected by fashion, advertising and other psychological perceptions of products

Question 23

How does disposable income affect quantity demanded of a product?

Answer 23

Buyers’ income plays an important part in determining demand . The higher the income, the greater the ability to buy goods and services which can lead to higher demand. It affects how much is bought as well as the demand for WHAT product

Question 24

How does prices of other goods affect quantity demanded of a product?

Answer 24

If a substitute for a certain good is cheaper than the original good, the demand for that substitute good ill be higher than the original good because it is cheaper.

If the prices of a certain good increases, then the demand for a complementary good will be decreased. I.e. if the prices of cars increase, the demand for cars will probably decrease, and because of that the demand for petrol will also decrease

If the prices of unrelated products increase or decrease it will basically have no effect on the quantity demanded.

Question 25

How do expectations affect quantity demanded of a product?

Answer 25

Consumer expectations of the future will affect their buying decisions because if they expect that they will have a worsening economic situation in the future, then they are unlikely to demand much of a product. Also, expectations of price changes, uncertainty of supply can influence consumers to alter demand decisions

Question 26

How does technology affect the quantity demanded of a product?

Answer 26

Technological change affects the level of demand for particular goods. If a new product is seen as being technically superior, its demand can increase at the expense of existing goods

Question 27

How does credit affect the quantity demanded of a product?

Answer 27

The cost and availability of credit affects the demand for items such as houses, motor vehicles and electrical appliances as these items are nearly always bought by borrowing money which is what credit is.

Question 28

What is the demand schedule?

Answer 28

A market demand schedule is a tabulation of the quantity of a good that all consumers in a market will purchase at a given price. The purpose of it is to create a demand curve to help visualise the quantity of a good demanded at a given price

Question 29

What is the law of demand?

Answer 29

Law of Demand states that consumers will demand more at a lower price but ill demand less at a higher price

Question 30

What is the income effect?

Answer 30

Income effect shows that as price falls, a person's unchanged money income can buy more.

Question 31

What is the substitution effect?

Answer 31

States that at a lower price the good's substitutes are now in more demand

Question 32

How do the income and substitution effects interact with each other and what do they reveal?

Answer 32

They usually combine to increase quantity demanded at lower prices and decrease quantity demanded at higher prices

Question 33

What are some exceptions to the law of demand and typical demand schedule?

Answer 33

An exception occurs when a good's appeal lies in its high prices, in this situation, more might be demanded at higher prices than at lower prices

Question 34

What is the typical demand schedule like?

Answer 34

As the price increases, there is less quantity demanded and as the price decreases, there is more quantity demanded GENERALLY.

Question 35

What is the demand curve?

Answer 35

The demand curve is a two dimensional representation of the demand schedule. The graph is drawn with price along vertical axis and quantity demanded on the horizontal axis. The typical demand curve slopes downward from left to right

Question 36

What is ceteris paribus?

Answer 36

with other conditions remaining the same; other things being equal is the official translation

Question 37

What are extensions and contractions of a demand curve?

Answer 37

Extensions and contractions are essentially the movements along an existing demand curve. They are a response to changes in prices of goods and services

Question 38

What causes an extension/expansion in a demand curve?

Answer 38

An extension in demand occurs when demand increases due to a fall in price, thus creating more demand, shifting the point on a demand curve down (closer towards the x-axis). Movement to the right from a certain 'market equilibrium' through the interaction of demand and supply curves Look at Figure 6.3 on Riley Economics for example

Question 39

What causes a contraction in a demand curve?

Answer 39

A contraction in demand occurs when demand decreases due to an increase in price, thus creating less demand and shifting the point on a demand curve up (towards the y-axis) Movement to the left from a certain 'market equilibrium' through the interaction of demand and supply curves Look at Figure 6.3 on Riley economics for example

Question 40

What gradient does a normal demand curve have?

Answer 40

The line has a negative gradient and is a straight line

Question 41

What do changes in other demand determinants (other than price) result in? (what happens to the curve)

Answer 41

Gets shifted left or right of the original curve

Question 42

What does an increase in demand mean and how does it affect the demand curve?

Answer 42

An increase in demand means that buyers now have a greater or more intense demand for the good. This results in a shift to the right in the demand curve

Question 43

What does a decrease in demand mean and how does it affect the demand curve?

Answer 43

A decrease in demand means that buyers are now less willing to purchase the good. This results in a shift to the left in the demand curve.

Question 44

What does a contraction in demand mean and how does it affect the demand curve?

Answer 44

A contraction in demand is the result of a price rise. This results in a point (from another point in the middle of the curve) shifting up (towards the y-axis)

Question 45

What does an expansion in demand mean and how does it affect the demand curve?

Answer 45

An expansion in demand is the result of a price fall. This results in a movement down the curve (towards the x-axis)

Question 46

What are seven different reasons as to why the demand curve may shift to the left or right?

Answer 46

Changing consumer tastes and preferences Buyers income Price of other goods Expectations Technology Credit Population factors

Question 47

How do changing consumer tastes and preferences affect the demand curve?

Answer 47

Positive/favourable change in consumer taste for a product twill increase the demand for a product and shift the demand curve to the right. A reason for this may be a successful advertising campaign On the other hand, a negative attitude to a good will lead to less of the good being demanded, this results in the demand curve shifting to the left. This could occur with last season's fashions

Question 48

How do buyers income affect the demand curve?

Answer 48

When income rises, there is an increased disposable income which means people can afford to buy more goods. Thus, the demand increases, and shifts the curve to the right. This is the opposite when income decreases.

Question 49

How do prices of other goods affect the demand curve? (Complementary, substitute, unrelated)

Answer 49

Price of complementary goods: The demand for one good will move in the opposite direction to the price movement of the complement. This is because since they are basically the same good, when one good is demanded more, the other good is not needed and thus the trend mentioned above occurs Price of substitute goods:

Question 50

How do expectations affect the demand curve?

Answer 50

Consumers' expectations of the future will affect their buying decisions. Especially if the purchase is considered 'major'. If a consumer believes that a good's supply will be uncertain in the future, this may increase demand, however, this can be the opposite if a consumer believes that a good's supply will remain constant, thus the demand will stay the same. Poor expectations of the future will make consumers reluctant to spend their money in fear of unemployment

Question 51

How does technology affect the demand curve?

Answer 51

Technological superiority of new and innovative goods can increase their demand. There is typically a higher demand for more 'new' technological goods as compared to a lower demand for more 'old' technological goods.

Question 52

How does access to credit affect the demand curve?

Answer 52

If a person has access to a larger amount of credit, they are more likely to purchase more goods because they have more credit available for them. This is the opposite when the person has access too less credit.

Question 53

How do population factors affect the demand curve?

Answer 53

The size of a country's population affects the market demand for all goods as it determines the number of buyers. Another thing is that a community may be leaning towards a certain demographic leading to a business having to capitalise on demand from that certain demographic , i.e. more girls than boys, this means that businesses selling girls clothing will be more profitable than one selling boys clothing

Question 54

What is supply?

Answer 54

Supply is the quantity OFFERED for sale at a given price in a certain period of tie. It is not simply the amount of a good existing at a time

Question 55

What are the two things supply rely on?

Answer 55

Supply depends on the amount that is physically possible to supply the market with and the willingness of suppliers to offer particular goods for sale

Question 56

What is market supply?

Answer 56

Market supply is the addition of the supply from all the firms that offer goods to a market

Question 57

What is the supply schedule?

Answer 57

It is a table showing the different quantities that will be supplied over a range of prices in a particular time period

Question 58

What is market structure?

Answer 58

depicts how firms are differentiated and categorised based on the types of goods they sell and how their operations are affected by external factors and elements.

Question 59

What is market power?

Answer 59

The ability of a firm to influence the price a product or service is sold at

Question 60

What is the idea of pure competition market structure?

Answer 60

It is a theoretical model of perfect competition. It does not truly exist in real life

Question 61

What is the idea of monopolistic competition market structure?

Answer 61

Here, there are many small firms in the industry, and is a form of imperfect competition. Here, firms have to rely on product differentiation to have control over price. Advertising plays a massive role in attracting new customers and making existing ones

Question 62

What is the idea of an oligopoly market structure?

Answer 62

A small number of large firms dominating the industry. Here, firms constantly monitor behaviour of rival firms in the industry, and has to consider reactions of competitors when changing prices or policies. Here, oligopolists tend to compete through advertising their products as opposed to price cutting

Question 63

What is the idea of a monopoly market structure?

Answer 63

Only one producer in the industry. Here, advertising is unnecessary because they don't need to win over customers, as there aren't any competitors

Question 64

What are the five characteristics of a pure competition market structure?

Answer 64

Many small buyers and none of them are large enough to affect the market price Products sold by all firms are homogenous Buyers do not incur any cost for changing suppliers No barriers to new films entering or existing firms leaving the market Sellers can sell as much of their product at market price

Question 65

Why do firms in a pure competition market have to be 'price takers'? (meaning that they have to accept thee market price)

Answer 65

Because noone sells above market price (because buyers can get same product at lower prices) Noone will sell below market price (because it is not profit maximising)

Question 66

What are three characteristics of a monopoly?

Answer 66

There is only one firm selling the product, and there is no market competition at all The product being sold has no close substitute There are significant barriers to entry

Question 67

Why are monopolists the price setters? (set the price of the product)

Answer 67

Because there aren't enough competitors to compete with them on a price level.

Question 68

True or false? Generally, as level of competition increases, prices are likely to fall and output increase

Answer 68

True

Question 69

What are four characteristics of a monopolistic competition?

Answer 69

A large number of relatively small firms Products sold are similar but not identical (because of need for product differentiation) Because of product differentiation, some firms can have some price-setting power

Question 70

What are three characteristics of an oligopoly?

Answer 70

There are only a few relatively large firms, each of which have a significant share of the market Sell similar but differentiated products Significant barriers to entry

Question 71

What are examples of oligopolies?

Answer 71

Supermarkets; dominated by Woolworths and Coles Airlines in Australia; Virgin, Qantas

Question 72

What are examples of monopolies?

Answer 72

Natural gas, electrical and other utility companies. These exist as NATURAL monopolies.

Question 73

What are examples of monopolistic competition?

Answer 73

Restaurants, hair salons, clothing

Question 74

What is a natural monopoly?

Answer 74

A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors.

Question 75

HOW and WHY has the government tried to change these market structures?

Answer 75

Wants to prevent market structures which are monopolistic as it undermines consumer sovereignty and also that means that there is no competition, and the market is free to set prices to whatever they want, even though it may have negative impacts on the consumers

Question 76

What is meant by “consumer welfare” in relation to market structures?

Answer 76

Ensuring that the consumer's goals are being met in various market structures through allowing for consumer sovereignty, etc.

Question 77

What is the law of supply?

Answer 77

an increase in price results in an increase in quantity supplied

Question 78

What are price floors?

Answer 78

A price floor is a minimum price which is chargeable for a certain good or service and is normally set by the government

Question 79

What are price ceilings?

Answer 79

A price ceiling is a maximum price which is chargeable for a certain good or service and is normally set by the government

Question 80

What are externalities?

Answer 80

Externalities refers to situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.

Question 81

What are merit goods?

Answer 81

A merit good is a good which when consumed provides external benefits, although they may not be fully recognised as beneficial, thus the good is under-consumed. These can be excludable. Generally, it's not supplied by private businesses because of lack of profit I.e. Education and healthcare

Question 82

What is a social wage?

Answer 82

Social wage is a set of basic, universal benefits available to all, i.e. Medicare, Public School

Question 83

What is price elasticity?

Answer 83

The responsiveness of Demand or supply to a change in price

Question 84

What are factors affecting elasticity of demand? (4)

Answer 84

Necessities and luxuries Existence of close substitutes Proportion of income spent on the good Length of time since a price change

Question 85

What are factors affecting elasticity of supply? (2)

Answer 85

a

Question 86

What are factors affecting elasticity of supply?

Answer 86

a

Question 87

What is price elastic?

Answer 87

Demand is price elastic if the change in the quantity demanded is proportionately greater than the initial change in price e.g. if the price of new cars fell by 5% and the demand for new cars increased by 10%, the demand for new cars is relatively price elastic.

Question 88

How do necessities and luxuries affect elasticity of demand?

Answer 88

Necessities are most likely to be inelastic because demand has to remain even if price increases Luxuries are more durable goods. The more durable a good is, the more elastic the demand is relative to single use goods.

Question 89

How do existence of close substitutes affect elasticity of demand?

Answer 89

Goods for which close substitutes exist tend to have a relatively more elastic demand than goods for which there are few if any close substitutes (i.e. elasticity). This is because people can easily switch if they want, thus affecting elasticity

Question 90

How does the proportion of income spent on the good affect elasticity of demand?

Answer 90

If proportion of consumer income spent in consuming a good is small, the demand for the good will be relatively inelastic However, if there is a higher proportion of consumer income spent on goods, the demand for it becomes extremely price elastic

Question 91

How does the length of time since a price change affect elasticity of demand?

Answer 91

In general terms the greater the lapse of time, the higher is the elasticity of demand because consumers will adjust their demand according to the development of substitute goods and services. If the price of a good or service rises and there are few substitutes available, consumers may continue consuming similar quantities of the good or service.

Question 92

What is unit elastic?

Answer 92

Unit elastic if the change in the quantity demanded is proportionately the same as the initial change in price e.g. if the price of tomatoes rose by 10% and the demand for tomatoes fell by 10%, the demand for tomatoes is unit elastic.

Question 93

How does Price of good or service affect supply?

Answer 93

the higher the price and mark up that a producer can get for the product or service in the market, the greater the incentive to supply depending on supply costs.

Question 94

How does price of other goods and services affect supply?

Answer 94

if the prices of alternative goods and services are higher than others, producers may switch to supplying the alternative goods and services if prices and profits are potentially higher in the market.

Question 95

How do prices of factors of production/resources affect supply?

Answer 95

resources: lower production costs will enable producers to increase supply over a range of prices, whereas higher production costs will force producers to reduce their supply.

Question 96

How does the state of technological progress affect supply?

Answer 96

technological advances may lead to lower production costs, less lead time and new products, which enable producers to increase supply.

Question 97

How does expectations of producers affect supply?

Answer 97

if producers expect a large demand for a certain product or service in the market, they will take risks and invest in production to capitalise on profitable market opportunities.

Question 98

How do seasonal influences affect supply?

Answer 98

changes in climatic conditions will affect agricultural output, and other production activities may be influenced by seasonal variations in demand, which can impact on supply in markets

Question 99

Look at extension and contraction as well as shifts in supply and demand curve

Answer 99

Also look at price floors and ceilings ,

Question 100

What are five factors influencing shifts in supply curve?

Answer 100

Change in prices of other goods and services Changes in prices of factors of Production Changes in Technology Changes in producer expectations Changes in seasonal influences

Question 101

What causes an extension in supply?

Answer 101

When price of good or service rise and producers respond by increasing supply in expectation of increasing profits

Question 102

What causes a contraction in supply?

Answer 102

When price of good or service falls and producers decrease their supply in market in order to minimise costs of production

Question 103

What are the differences between shifting the supply curve to the left or to the right?

Answer 103

Right: Increase in supply Left: Decrease in supply

Question 104

What are five factors influencing shifts in supply curve?

Answer 104

Change in prices of other goods and services Changes in prices of factors of Production Changes in Technology Changes in producer expectations Changes in seasonal influences

Question 105

What are the differences between shifting the supply curve to the left or to the right?

Answer 105

Right: Increase in supply Left: Decrease in supply

Question 106

Change in prices of other goods and services

Answer 106

Changes in the prices of competing or alternative goods and services in the market will affect the relative profitability of producing an existing good or service. For example, if the price of the existing good or service supplied rises relative to other goods and services, other entrepreneurs may switch resources into its production. In this case the entrepreneur and new entrants to the industry may increase the supply of the existing good or service in the market.

Question 107

Changes in prices of factors of Production

Answer 107

A rise in the prices of the factors of production (i.e. wages, rent, interest and profit) will raise production costs for the firm or industry and reduce profitability. Thus firm makes decision to perhaps cut back on production to increase profitability A fall in prices will have a different effect

Question 108

Changes in Technology

Answer 108

Improvements in technology usually lead to increased efficiency and productivity of the factors of production. Technological advances tend to reduce production and selling costs, enabling firms to increase supply.

Question 109

Changes in producer expectations

Answer 109

Many entrepreneurs and managers may have preferences for a particular type of production or type of good or service to produce because of knowledge, experience, expertise and skills in the industry.

Question 110

Changes in seasonal influences

Answer 110

Changes in seasonal influences are most relevant to the supply of agricultural produce. Favourable seasonal conditions will have beneficial effects and increase supply, however if seasonal influences are poor, it will decrease supply I.e. whether or not there are floods or droughts

Question 111

Changes in seasonal influences

Answer 111

Changes in seasonal influences are most relevant to the supply of agricultural produce. Favourable seasonal conditions will have beneficial effects and increase supply, however if seasonal influences are poor, it will decrease supply I.e. whether or not there are floods or droughts

Question 112

What are factors affecting elasticity of supply?

Answer 112

Inventories (or ability to hold stocks) Extent of excess capacity Production time periods (depending on the time period there may be different elasticities of supply

Question 113

What are the three production time periods?

Answer 113

Market period, Short run, long run

Question 114

What is market period?

Answer 114

In the market period supply cannot be adjusted due to changes in price, as the quantity supplied to the market is fixed, since inventories or stocks of unsold goods are finite

Question 115

What is short run?

Answer 115

In the short run producers have both fixed and variable factors, but can adjust supply due to small changes in price, by using their existing plant size (the fixed factor) more or less intensively.

Question 116

What is long run?

Answer 116

In the long run producers can vary their plant size and adjust output levels in response to small changes in price. Supply is highly elastic in the long run

Question 117

Why is inventory (ability to hold stocks) important for elasticity of supply?

Answer 117

If producers are able to hold stocks of unsold goods or inventories, their supply will be more elastic than if they are not able to hold stocks which can supplement current levels of output or supply. The ability to hold stocks depends on the nature of the good (i.e. whether or not it is perishable), the extent of storage capacity, and the nature of distribution in the industry. The greater the ability to hold stocks or inventories, the more elastic the supply in a market.

Question 118

Why is extent of excess capacity important for elasticity of supply?

Answer 118

Excess capacity refers to the difference between the actual and potential output of a firm with a given level of plant capacity. If a firm has excess capacity, it may be able to respond quickly to rises in price by increasing its production, by using its existing plant more intensively. Its supply will be therefore be more elastic than a firm operating at full or maximum capacity. Similar, vice versa

Question 119

Is the steeper or more flat supply curve elastic?

Answer 119

The more flat it is, the more elastic it is, the more steep it is the more inelastic it is

Question 120

What is price elasticity of supply?

Answer 120

Refers to responsiveness of the quantity suppled due to small change in price of a good or service

Question 121

What does it mean if supply is price elastic?

Answer 121

Supply is price elastic if the change in the quantity supplied is proportionately greater than the initial change in price e.g. if the price of new cars rose by 10% and the supply of new cars increased by 15%, the supply of new cars is relatively price elastic;

Question 122

What does it mean if supply is price inelastic?

Answer 122

Supply is price inelastic if the change in the quantity supplied is proportionately less than the initial change in price e.g. if the price of cigarettes rose by 5% and the supply of cigarettes rose by 1%, the supply of cigarettes is relatively price inelastic; and

Question 123

What does it mean if supply is unit elasatic?

Answer 123

Supply is unit elastic if the change in the quantity supplied is proportionately the same as the initial change in price e.g. if the price of tomatoes rose by 10% and the supply of tomatoes rose by 10%, supply is unit elastic.