Week 3: Demand and Supply & MCQ Flashcards

1
Q

What is the def. of demand, law of demand and ceteris paribus?

A

def: the quantities of a good that buyers are willing and able to pay at various prices at a particular point in time, ceteris paribus

law of demand: the quantity of a good demanded is inversely related to its price

ceteris paribus: holding all other factors constant

  • Quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.
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2
Q

What are the reasons for the inverse relationship between demand and price?

A

Substitution effect: as the price of the good ↑ consumers substitute away from this good towards a relatively cheaper alternative (e.g. away from oranges towards apples).

Income effect ↓ in price means purchasing power of our existing income has ↑

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3
Q

Define quantity supplied and the law of supply

A

Supply refers to the relationship between price and the quantity of a good or service producers are willing and able to produce at a particular point in time, reflects the higher (marginal) costs of producing more units (hence charge more to cover costs) and greater revenues for firms

The quantity supplied of any good is the amount that sellers are willing and are able to sell.

law of supply: the quantity of a good supplied is positively related to its price, ceteris paribus (other things being equal)

the increase in price acts as a signal to firms to allocate more resources to this good

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4
Q

What is a market and what is equilibrium price/quantity also known as?

A

market: mechanism that coordinates the independent intentions of buyers and sellers

equilibrium price and quantity = market clearing price

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5
Q

<p>Describe the different states a market can be in</p>

A

Equilibrium occurs when the plans of the buyers match the plans of the sellers, QD = QS
neither a shortage nor a surplus, hence no pressure for a change in price (ceteris paribus)

Surplus
when QS>QD, market will have a surplus
Firms find they have unsold stock which puts ↓ pressure on prices to get rid of excess stock
as prices ↓, the quantity demanded will ↑ until it reaches QS at equilibrium price

Shortage
when QD>QS, market will have a shortage
firms find that at this rice they are quickly selling out of their good, this creates pressure for ↑ prices, which induces firms to supply more
as prices ↑, the quantity demanded by consumers will ↓ until it meets QS at equilibrium price

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6
Q

What are non-price determinants of demand?

A

causes shifts in the entire demand curve, that is at each and every price, more or less is demanded

1.Changes in the price of related goods

substitutes (alternatives): an ↑ in the price of one leads to an ↑in the demand for the other, ↑P↓Q
i.e. if the price of apples increases, some people may substitute towards oranges, shifting the demand curve for oranges to the right

complements (goods that ‘go together’): an ↑ in the price of one leads to a ↓ in the demand for the other, ↑P types of goods:
normal goods: as income ↑, demand ↑
Inferior goods: as income ↑, demand ↓

3.Changes in preferences
although subjective, preferences play a vital role in determining demand
assume tastes are stable (but can and do change over time)
changes in preferences <ul> towards a good or service: demand ↑, shift demand curve to the right away from a good or service: demand ↓, shift demand curve to the left.

4.Number of buyers
as population increases the demand for most goods and services will increase, simply because there are more people in the market

5.Changes in expectations
If buyers expect prices to ↑ in the future, they buy as much as they can as soon as they can
if buyers expect prices to ↓ in the future, they delay their purchasing for as long as they can i.e. deflation in Japan in the 1990s and beyond</ul>

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7
Q

<p>What are non-price determinants of supply?</p>

A

1.Price of inputs
all goods and services require inputs to produce them. If the price of these inputs change, then the overall cost to the producer will also change.
an ↑ in the price of an input will increase overall costs, and so the supply curve will shift to the left (up)
a ↓ in the price of an input will decrease overall costs, and so the supply curve will shift to the right (down)

2.Technological change
technology represents the stock of knowledge about how to combine resources most efficiently.
i.e. an improvement in technology will lead to a ↓ in the costs of production for firms. Supply curve will shift to the right (or down) – can produce the same amount of output with less inputs/produce more output with the same amount of inputs

3.Expected future prices
if firms expect prices to be higher in the future, they may decrease supply now and increase it in the future<

4.Changes in number of firms
market supply = the sum of the quantities supplied by all individual sellers
an ↑ in the number of sellers will therefore lead to an ↑in supply (shift to the right)

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8
Q

<p>Describe historical changes in oil price and reasons why</p>

A

1950s-1960s: relatively steady oil prices as the relative importance of oil was not fully realised by producers and buyers
Before the Yom Kippur War, the price of oil was around $17 per barrel. after the war, the Arab countries punished supporters of Israel by putting an embargo on exports to those countries including the US
Supply decreased, and the price of crude increased to over $54 per barrel.

Around 1984: ‘oil glut’, POEC countries sold as much oil as they could, massive increase in supply and fall in price
early 2000s: strong economic growth which translated to high incomes especially in China and the US which led to an increase in price and quantity

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9
Q

lamb supplies are sharply reduced because of a drought in the lamb-raising states, and consumers turn to chicken as a substitute for lamb, describe what happens to price and quantity

A

A decrease in supply due to the drought in these lamb-raising areas, fall in quantity demanded and rise in price
The consumers who substitute away from lamb are captured in the fall in the quantity demanded from Q0 to Q1 induced by the ↑ in price (the substitution effect)

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10
Q

<p>What is the concept of consumer/producer surplus used for?</p>

A

when people engage in the exchange of goods and services, they do so voluntarily, the concept of consumer and producer surplus is used to gauge how much benefit consumers and producers get from trade.

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11
Q

<p>Define consumer surplus</p>

A

<p><em>def.</em>: the difference between the maximum price a consumer is willing to pay for a good and the price they actually pay for that good.</p>

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12
Q

Define producer surplus

A

def.: the difference between the (marginal) cost of producing a good and the price actually received for that good

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13
Q

<p>Describe market equilibrium</p>

A

total economic surplus = total consumer surplus + total producer surplus this gives us the value of the total gains from the exchange of goods in this market in equilibrium, the gains to producers and consumers are therefore maximised any deviation from the equilibrium price will result in a smaller total surplus

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14
Q

Describe a DWL

A

Deadweight loss
the reduction in total economic surplus that occurs when the market does not operate at its most efficient point i.e. there are mutually beneficial exchanges that could take place, but which are not

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15
Q

<p>Define an efficient market</p>

A

one where the total economic surplus is as large as it could possibly be (ceteris paribus), where the marginal benefit of the last unit consumed is equal to the marginal cost of producing it, MB = MC

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16
Q

<p>Define comparative advantage</p>

A

country that can produce goods at a lower cost/more efficiently (using less resources for production of same amount of goods or same amount of resources for production of more goods)

17
Q

Describe the export market

A

Occurs if domestic price is lower than the world price i.e. the country has a comparative advantage in production of the good
leads to smaller domestic consumption (Qd) but higher production
reduction in domestic consumer surplus and increase in domestic surplus

18
Q

Describe the import market

A
19
Q

Define tariffs

A

a tax on goods entering the domestic economy when it does not have a comparative advantage, it is placed on imported goods in an attempt to raise the world price of the good for domestic consumers

consumers are worse off as a result of the tariff and producers are better off, creates a DWL

20
Q

Describe arguments for tariffs

A

protect local jobs: from child/cheap labour overseas, gain in total surplus corrects this as with extra demand/supply this creates jobs

unfair competition: similar to above, protect domestic industries, rewards inefficiency
infant industry: allows starting industries to get on their feet, creates reliance on protection policy
national security: in case of global conflict or war economics should be self-sufficient
protection as a ‘bargaining chip’: i.e. especially with Trump between China and Mexico

21
Q

Graphically, the market demand curve is:

A

The horizontal sum of the individual demand curves

22
Q

Which of the following will not cause a change in the demand curve for cars?

A) A change in the price of cars
B) A change in the price of petrol
C) A change in the quality and quantity of public transport
D) A change in household income
E) A change in the number of buyers
A

A change in household income.

On second thought:
It’s asking about a change in the demand curve, NOT a shift.
A = change in demand curve
B = shift in demand curve

23
Q

Coordination of economic activity in a market economy is achieved by:

A

The guiding function of prices

24
Q

Water shortages caused by droughts can be lessened by:

A

Restricting water usage of consumers OR

Allowing prices to equate the demand for water with the supply of water

25
Q

Which of the following would NOT shift the demand curve for beef?
a) a reduction in the price of cattle farm fencing
B) a change in the income of beef consumers
C) an effective advertising campaign by pork producers
D) a widely publicised study that indicates beef increases one’s cholesterol
E) none of the above

A

A= If production cost decreases, becomes more profitable so prices could be decreased to increase demand?
+ it’s cattle farm fencing, not beef
Demand is decided by price vertically and quantity sold horizontally.
If A decreases, price would decrease and quantity sold increases.

B) change in the income of beef consumers:
Maybe this would cause beef prices to be inflated

Locked in none of following

26
Q

Suppose consumers demand 40 units of a produced when the price is $12 per unit and 25 units when the price is $18 each. Find the demand equation assuming that it is linear. What is the price per unit when 30 units are demanded?

A

$16

(Y2 - y1)
__________
(X2 - x1)
?

If price = y
Qty sold = x

18 - 12
________
25 - 40

6/-15 = -2/5
For every $2 increase, -5 units or +5 units for every $2 decrease
40 - 30 = 10 
10 / 5 = 2 
2 * 2 = $4 
4 + 12 = 16
27
Q

On solving the following system of linear equations (x + 4y = 3, 3x - 2y = -5) the values of x and y are what?

A
  1. Isolate X in first equation
    X = -4y + 3
2. Substitute X in second equation
3x - 2y + 5 = 3(-4y + 3) -2y + 5, 
-12 + 9 - 2y + 5 = 0
14y = 14
Y = 1
  1. Substitute Y in first equation.
    X + 4y = 3
    X + 4 = 3
    X = -1

X + 4y = 3 and 3x - 2y = -5

  1. X = -4y + 3
  2. Substitute X in second equation:
    -12y + 9 - 2y = -5
  3. Simplify
    -14y = -14
    14y = 14
    Y = 1
28
Q

What is a market? What are the characteristics of a perfectly competitive market?

A

A market is a group of buyers (who determine demand) and a group of sellers (who determine supply) of a particular good or service. A perfectly competitive market is one in which the goods being offered for sale are all the same and in which there are many buyers and many sellers so that each has a negligible impact on the market price.

29
Q

What is a monopoly?

A

In a market where there is only one supplier of a product, the seller who can set the price is called a monopoly.

Examples:
Local water company if the residents of your town probably only have one company from which to buy tap water.
Apple’s App Store because they do not allow other services to provide applications to users.

30
Q

How do you differentiate between shifts and movements along the demand or supply graph?

A
  1. Any changes on what is labelled on either axis (price + demand or price + supply) causes a movement along the graph.
  2. Any changes in something that is not labelled on either axis causes a shift in the graph.