Week 7 - Microeconomics & supply/demand curve

Question 1

What is microeconomics a study of?

Answer 1

the problem of scarity.

Question 2

What is the economic problem?

Answer 2

Not having enough resources to satisfy every need.

Question 3

What is a centrally planned or command economy?

Answer 3

1. The government owns all the resources and decides what and how much to produce, and who will receive it.
2. They do not suffer from unemployment or inflation (the ups and downs of the business cycle).
3. The distribution of wealth is more equal….. but suffers from poor-quality goods, shortages and unhappy citizens.

Question 4

What is a Market economy or free market economy?

Answer 4

When the interaction between households / firms with the market allocate economic resources.
Controlled by the law of supply and demand which determines the price of goods and services.
The exchange of goods, services and information takes place freely according to buyer and supplier.

Question 5

What is a mixed or modern economy?

Answer 5

It is an economic system in which most economic decisions result from the interaction of buyer and sellers in markets. But the government plays a significant role in the allocation of the resources.

Question 6

What is a market?

Answer 6

A group of buyers and sellers and the institution by which they come together to trade.

Question 7

What are the aspects of a perfectly competitive market?

Answer 7

1. A large number of buyers and sellers, none of whom can exert power over the market.
2. Free entry and exit for sellers
3. All participants in the market are in possession of complete information.
4. No produce differentiation.
5. everyone acts rationally
6. Prices are fully flexible (they can alter with supply and demand)

Question 8

What is the demand curve and how does it work?

Answer 8

1. Consumers drive demand
2. It curves in a downward sloping direction.
3. Lower prices = increase quantity
4. higher prices = decrease quantity

Question 9

What can cause a shift in demand?

Answer 9

1. Changes in income levels.
2. Changes in tastes.
3. Changes in prices of other goods.
4. Expectation of future taxes.
5. Promotion and advertising of goods

Question 10

When demand shifts what is the impact of the demand curve?

Answer 10

Increase demand, causes a shift to the right = increase prices and increase quantity.
Decrease in demand, causes a shift to the left = decrease prices and decrease quantity.

Question 11

What is the supply curve and how does it work?

Answer 11

Suppliers drive the supply curve.
The curve slopes upwards
Always starts in a positive position (no one wants to sell a product at $0)
higher prices = more suppliers
lower prices = fewer suppliers

Question 12

What causes a shift in supply?

Answer 12

1. Changes in the prices of inputs to the production of the goods (i.e. labour, energy)
2. Innovation of technology
3. Natural disasters
4. Imposition of new regulations.

Question 13

When supply shifts what is the impact on the supply curve?

Answer 13

Increase in supply - shifts to the right = decrease prices and increase in quantity.
Decrease in supply - shifts to the left = increase in prices and decrease in quantity.

Question 14

What determines market prices?

Answer 14

Neither consumer or supplier determine price.
The interaction (meeting point) of demand and supply determine the equilibrium price (P*) and quantity (Q*).

Question 15

What is price ceiling and how is it imposed?

Answer 15

Government sets highest price that a product can be sold for.
Price is lower than market price… Which increases demand, but decreases supply = creates a shortage.
The result of a shortage can lead to black market activity

Question 16

What is price floor and how is it imposed?

Answer 16

Government sets the minimum price a product can be sold for.

Price is higher than market price… which decreases demand, but increase supply = excess supply.

Question 17

What happens when taxes are imposed on goods and why?

Answer 17

The price shifts up with the tax.
Producers get a lower price then originally, so they bear part of the tax.
Tax can be imposed to increase revenue or reduce consumption.

Question 18

What is the affect of demand on the bond market?

Answer 18

Government bonds are freely traded in the financial markets and therefore their price alters with supply and demand.
If demand increases - their price will increase and the amount of yield produced with decrease.
If demand decreases - their price will decrease and the amount of yield produced with increase.

Question 19

What is the affects of supply on the bond market?

Answer 19

Too much supply could result in concerns that the government might default on repayment.
Increase supply = decrease in price and increase in yield.

Question 20

What is the affect of supply and demand on loan able funds?

Answer 20

High interest rate will reduce the amount borrowed…. but increase the amount lenders are willing to lend.
Low interest rate will increase the amount borrowed… but decrease the amount lenders are willing to lend.

Question 21

How does the supply and demand curve work with the labour market?

Answer 21

If left to freely adjust (i.e. wages and quantity of people in the labor market), it will deliver no unemployment.
Demand is governed by employers
Supply is governed by employees.

Question 22

If the labour market it left to adjust freely, what would happen during a downturn?

Answer 22

Wages would drop and the quantity of people in the labor market would also drop (as some people wouldn’t be willing to work for less).
This would lead to no unemployment.

Question 23

What is meant by the term “sticky wages”

Answer 23

According to keynes wages are sticky in a downward direction.
This means that people do not want to reduce their wages.
Therefore while demand might decrease, wages tend to remain the same. Resulting in supply of labor exceeding demand - which results in unemployment.

Question 24

What is rigidity in the labor market?

Answer 24

Rigidities are things that prevent the labor market from adjusting freely:

1. Generosity of unemployment benefits
2. Disincentive effects on tax structure
3. Regulated minimum wages
4. Employment law protective of the position of incumbent workers.
5. Union power.