Demand and Supply

Question 1

Define the Law of Demand

Answer 1

The quantity demanded of a good will rise as the price fall, and will fall as the price increases, ceteris paribus.

This negative relationship can be seen in the downwards sloping demand curve.

Question 2

What is the demand function?

Answer 2

Qd = a - bP

a - the y-intercept (when price is 0)
b - the slope of the curve

Question 3

Define quantity demanded

Answer 3

The quantity of a commodity that consumers are willing and able to buy at a given price over a period of time.

Question 4

What is the demand function that includes disposable income?

Answer 4

Qd = a - bP + cYd

Question 5

Define Quantity supplied

Answer 5

The quantity of a commodity that producers are willing and able to sell at a given price over a period of time.

Question 6

What is the equilibrium?

Answer 6

A place where sellers and buyers meet to trade. Buyers are willing and able to buy at the same price and quantity at which producers are willing and able to sell.

Question 7

What factors influence demand (apart from price)?

Answer 7

1. Advertisement
2. Real Disposable Income
3. Recessions and Inflation (Price Stability)
4. Substitutes (goods in competitive demand)
5. Complements (goods in joint demand)
6. Habits, Tastes and Fashions
7. Population Size and Structure
8. Distribution of Income
9. Availability of Credit
10. Religious/Cultural Practices

Question 8

What are the TWO reasons behind the Law of Demand?

Answer 8

The Income Effect
The Substitution Effect

Question 9

Define Consumer Surplus.

Answer 9

The difference between the maximum price consumers are willing and able to pay in order to buy a given quantity of a commodity and how much they actually pay.

Question 10

What are the reasons behind the Law of Supply?

Answer 10

1. Profit Motive
2. Diminishing Marginal Returns

Question 11

Define Producer Surplus.

Answer 11

The difference between the minimum price a producer is willing to accept in order to supply a given quantity of a commodity and how much they actually receive from consumers.

Question 12

What are non-price factors of supply?

Answer 12

1. Price of Factors of Production
2. Indirect Taxes and Subsidies
3. Technological Progress
4. Prices of Related Goods
5. Number of Firms in the Industry
6. Expectations of Future Price Changes
7. Weather
8. Diseases
9. Unexpected events