Supply & demand (1)

Question 1

What is a price taker?

Answer 1

A person or firm with no power to influence the market price.

Question 2

What is the law of demand?

Answer 2

The quantity of a good demanded per period of time will fall as the price rises and rise as the price falls.

Question 3

What is the income effect?

Answer 3

The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change.

Question 4

What is the substitution effect?

Answer 4

The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative products.

Question 5

What does quantity demanded refer to?

Answer 5

The amount of a good that a consumer is willing and able to buy at a given price over a given period of time.

Question 6

What are substitute goods?

Answer 6

A pair of goods which are considered by consumers to be alternatives to each other. As the price of one goes up, the demand for the other rises.

Question 7

What are complementary goods?

Answer 7

A pair of goods consumed together. As the price of one goes up, the demand for both will fall.

Question 8

What are normal goods?

Answer 8

A good whose demand rises as people’s income rises.

Question 9

What are inferior goods?

Answer 9

A good whose demand falls as people’s income rises.

Question 10

Why does the quantity demanded fall when the price rises?

Answer 10

This is due to the law of demand. People will feel poorer and not be able to afford as much of the good with their money, and the good will cost more than alternative or substitute goods, so consumers will move towards these.

Question 11

How do you draw individual and market demand curves?

Answer 11

[Here you would insert diagrams or descriptions of how to draw the curves.]

Question 12

What are six factors, other than price, that influence the demand for a good?

Answer 12

Tastes, number and price of substitute goods, number and price of complementary goods, income, distribution of income, and expectation of future price changes.

Question 13

Distinguish between a change in demand and a change in the quantity demanded.

Answer 13

A change in demand will shift the demand curve, while a change in quantity demanded will be a movement along the curve.

Question 14

What is a supply curve?

Answer 14

A graph showing the relationship between the price of a good and the quantity of the good supplied over a given period of time.

Question 15

What are substitutes in supply?

Answer 15

These are goods where an increased production of one means diverting resources away from producing the other.

Question 16

What are goods in joint supply?

Answer 16

These are two goods where the production of more of one leads to the production of more of the other.

Question 17

Give three reasons why quantity supplied increases with price.

Answer 17

Higher output means higher costs of production, higher prices make production more profitable, and sustained high prices attract new competitors into the market.

Question 18

Describe seven factors, other than price, that influence the supply of a good.

Answer 18

Cost of production, profitability of alternative products, profitability of goods in joint supply, nature and other unpredictable events, aims of producers, expectation of future prices, and the number of suppliers.

Question 19

Distinguish between a change in supply and a change in the quantity supplied.

Answer 19

A change in supply will shift the supply curve left or right, while a change in quantity supplied will be a movement along the curve.

Question 20

Give four reasons for changes in the costs of production.

Answer 20

Change in input prices, change in technology, organisational changes, and government policy.

Question 21

What is market clearing?

Answer 21

A market clears when supply matches demand.

Question 22

How do you calculate the equilibrium price and quantity?

Answer 22

By equating demand and supply functions, often using simultaneous equations.

Question 23

How do diagrams help determine market equilibrium and the effects of changes in demand or supply?

Answer 23

Diagrams show how an increase or decrease in demand or supply affects the equilibrium price and quantity.

Question 24

Give examples of financial, non-financial, and perverse incentives.

Answer 24

Financial incentives include price increases encouraging more production. Non-financial incentives can be gifting presents to family. Perverse incentives might involve banks lending less to small businesses when required to hold more capital.

Question 25

What is the identification problem in determining demand and supply curves?

Answer 25

It’s the difficulty of identifying the relationship between two variables when it’s unclear if other determinants have shifted the demand or supply curves.