Week 4 - types of economies, money, demand and supply

Question 1

Define effective demand

Answer 1

Demand for a good or service from consumers that is backed up with an ability to pay

Question 2

Define potential demand

Answer 2

Not yet expressed in market place because consumers do not have the ability to pay

Question 3

Define demand

Answer 3

The quantity that purchases are willing and able to buy at a given price in each time period

Question 4

What does the law of demand state?

Answer 4

Demand varies inversely with price - lower prices make products more affordable, while higher prices reduce demand.

Question 5

What does a fall in market price cause?

Answer 5

An extension in demand.

Question 6

What does a higher price lead to?

Answer 6

A contraction in demand

Question 7

What does a change in the market price of a product lead to?

Answer 7

A movement along the demand curve (not a shift!)

Question 8

Which way sloping is the demand curve?

Answer 8

Downward sloping

Question 9

Give two reasons why the demand curve is downward sloping

Answer 9

Income effect and the substitution effect

Question 10

Explain the income effect

Answer 10

A fall in prices = increases real purchasing power of consumers = allows people to buy more with their budget = for normal foods demand rises with an increase in real income as people now have higher purchasing power

Question 11

Explain the substitution effect

Answer 11

A fall in price of good X makes it relatively chapter compared to substitutes (good y) = some consumers will switch to good X leading to higher demand.

Question 12

What causes a shift in the demand curve?

Answer 12

Factors other than the price of the product

Question 13

Demand curve shifting outwards shows what?

Answer 13

More is demanded at each market price

Question 14

Demand curve shifting inwards shows what?

Answer 14

Less is demanded at each market price

Question 15

Give the causes of shifts in the demand curve

Answer 15

PASIFIC - population, advertising, substitutes, interest rates, fashions, income, complements

Question 16

Define derived demand

Answer 16

Derived demand is demand for a factor of production used to produce another good or service

Question 17

Give an example of derived demand

Answer 17

Wood is a product where a lot of demand comes from the uses to which it can be used e.g. fencing

Question 18

Define joint demand

Answer 18

When demand for one product is directly and positively related to demand for a related good or service - two products are complements.

Question 19

Give an example of joint demand

Answer 19

Fish and chips

Question 20

Define composite demand

Answer 20

Where goods have more than one use. An increase in the demand for one product leads to a fall in supply of the other.

Question 21

Give example of composite demand

Answer 21

Mile - it can be used for cheese, cream, butter etc.

Question 22

What are shifts of the supply curve caused by?

Answer 22

Changes in the conditions of supply

Question 23

What are the conditions of supply?

Answer 23

PINTSWC - Productivity, Indirect Taxes, Number of Firms, Technology, Subsidies, Weather, Costs of Production

Question 24

What is joint supply?

Answer 24

Where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by product

Question 25

Give an example of joint supply

Answer 25

A contraction in the market supply of lamb will lead to a reduced supply of wool

Question 26

What does equilibrium mean?

Answer 26

State of balance between market demand and supply. The equilibrium market price is the price at which the market for the product clears.

Question 27

What do we call it when demand and supply are out of balance?

Answer 27

Disequilibrium.

Question 28

What is excess demand?

Answer 28

When quantity demanded exceeds available supply. It happens when the current market price is below the equilibrium price.

Question 29

What does excess demand lead to?

Answer 29

Queuing and upward pressure on price = demand is rationed by higher prices = an expansion of supply as producers respond to incentive for higher profits

Question 30

What does excess supply mean?

Answer 30

The market price is above the equilibrium

Question 31

What does excess supply lead to?

Answer 31

Unsold goods = downward pressure on market price = prices fall = extension in demand = lowers the supply surplus = take the market back towards an equilibrium

Question 32

Give the four functions of money

Answer 32

A medium of exchange; a store of value; a unit of account; a standard of deferred payment

Question 33

What does medium of exchange mean?

Answer 33

it facilitates transactions between buyer and seller

Question 34

what does a store of value mean?

Answer 34

an asset that holds value over time

Question 35

Give two problems with a centrally planned system (a command economy)

Answer 35

weak profit incentives for businesses; system is unresponsive to consumers

Question 36

Give two advantages of a free market system

Answer 36

Competition drives innovation; the profit motive stimulates investment = lower prices for consumers

Question 37

Give 2 features of the free market system

Answer 37

markets allocate scarce resources; private sector is dominant

Question 38

What is a mixed economy

Answer 38

A mix of private and state ownership of businesses - the nature of the mix will vary from country to country

Question 38

Which thinker favoured the command economy

Answer 38

Marx

Question 39

Which thinker argued self interest has social benefits?

Answer 39

Adam Smith

Question 40

Which thinker - other than Smith - favoured a small government and laissez faire economics?

Answer 40

Hayek