Week 2: Demand, Supply & Equilibrium

Question 1

Markets:

Answer 1

• Generate jobs, incomes, raises welfare, and provide the means to improve environmental outcomes
• Create wealth
• Efficiently allocate resources
• Market based economies also tend to be more liberal and show greater respect for human and civil rights. They tend to be ‘freer’ societies

Question 2

The Demand Curve

Answer 2

Traces the relationship between the own price of a good and quantity demanded of that good, ceteris paribus

Question 3

A fall in the price of a good results in an

Answer 3

increase in the quantity demanded.

Question 4

Substitution effect -

Answer 4

as price for apples falls they become relatively cheaper than substitutes, (e.g. pears) and QD for apples rises

Question 5

Income effect -

Answer 5

as price of apples falls purchasing power of incomes rises and more apples are bought

Question 6

An outward shift of a demand curve =

Answer 6

an increase in demand

Question 7

Inward shift of a demand curve =

Answer 7

a decrease in demand

Question 8

The supply curve traces

Answer 8

he relationship between the own price of a good and quantity supplied of that good, ceteris paribus

Question 9

A fall in the price of a good brings about a

Answer 9

decrease in the quantity supplied.

Question 10

Increase in supply =

Answer 10

Quantity supplied increases at every price.

Question 11

Equilibrium means an

Answer 11

greed price to exchange - understanding the process of attaining market equilibrium.

Question 12

What do prices do?

Answer 12

• Critical role in the allocation of scarce goods and services
• Help allocate/distribute goods & services at the lowest possible cost and to their highest value
• Reflect relative scarcity and value
• Provide incentives to: supply and demand