1.1 Demand and Supply & Equilibrium

Question 1

Market

Answer 1

a physical or virtual place where people come together and exchange goods or services for currency.

Some types: 
product markets (goods and services), 
factor markets (factors of productions)(eg. labour market etc) and 
financial markets (stocks, currency etc.)

At core of market theory: concept of demand and supply.

Question 2

Demand

Answer 2

The quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period.

Question 3

The Law of Demand

Answer 3

states: As the price of a product falls, the quantity demanded of the product will usually increase, “cetereis paribus”

aka:
“The demand curve normally slopes downwards”

Question 4

ceteris paribus

Answer 4

an assumption of “all other things being equal”. When there are a number of different factors that determine something, only one is changing and all of the others are held constant.

Eg. in the Law of Demand price is changing but any other determinants of demand are assumed to be unchanging.

Question 5

The non-price determinants of demand.

Answer 5

if its’ no price, then it’s a shift in the curve.

1. Income:
   (concepts: normal goods & inferior goods)
2. The price of other products.
   (concepts: Substitutes & complements)
3. Tastes/Preferences

Other factors:

• size of population
• changes in age structure in population
• changes in income distribution
• government policy (eg. taxes)
• seasonal changes

Question 6

Veblen good

Answer 6

some products become more popular as their prices rise due to conspicuous consumption; he fact that people gain satisfaction from being seen to consume expensive products by others

Question 7

The Law of Supply

Answer 7

states: as the price of a products rises, the quantity supplied of the product will usually increase, ceteris paribus. or aka: the supply curve normally slopes upwards.

Question 8

Supply

Answer 8

Supply is the willingness and ability of producers to produce quantity of a good or service at a given price in a given time period.

Question 9

The non-price determinants of supply

Answer 9

1 .The cost factors of production

2. The price of other products, which the producer could product instead.
3. The state of technology
4. Expectations (eg. with holding)
5. Government interventions (eg. taxes)

Question 10

Movement along a supply curve vs a shift of the supply curve.

Answer 10

price change: movement along

other determinants: shift

Question 11

Equilibrium

Answer 11

“a state of rest, self-perpetuating in the absence of any outside disturbance”

Where demand meets supply.

Question 12

The invisible hand

Answer 12

Adam Smith metaphor of the demand and supply’s force

Question 13

Excess supply

Answer 13

When Qs is higher than Qd at a given price. More is supplied than demanded for given price.

Price will fall until there equilibrium.

Question 14

Excess demand

Answer 14

When Qd is higher Qs at a given price. More is demanded than supplied for the given price.

Price will have to increase until there’s equilibrium Qd and Qs.

Question 15

Consumer surplus

Answer 15

The extra satisfaction (or utility) that is gained by consumers from paying a lower price than that which they were prepared to pay.

Question 16

Producer surplus

Answer 16

The excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output.

Question 17

Allocative efficiency

Answer 17

When resources are allocated the most efficient way “from society’s point of view. Usually when things are equilibrium.

Question 18

Community surplus

Answer 18

Consumer srp. + Producer srp.

total benefit to society