2.3 + 2.4 - Demand + Supply

Question 1

Demand

Answer 1

Demand is the amount of a good/service that a consumer is willing & able to purchase at a given price in a given time period

Question 2

Ineffective demand

Answer 2

If a consumer is willing to purchase a good, but cannot afford to

Question 3

Individual demand

Answer 3

The demand of a good/service by an individual consumer

Question 4

Market demand

Answer 4

The combination of all the individual demand for a good/service
- calculated by adding up the individual demand at each price level

Question 5

The income effect

Answer 5

The change in consumption resulting from a change in real income

Question 6

Demand curve features

Answer 6

Slope right to left (upwards)
- price: y axis
- quantity: x axis

Question 7

Movements along the a demand curve

Answer 7

A change in quantity demanded as a result of changes in the price of the good only

Question 8

Extension of demand

Answer 8

When quantity demanded for a good increases because its price falls; it is shown by a movement down the demand curve to the right

Question 9

Contraction of demand

Answer 9

When quantity demanded for a good falls because its price rises; it is shown by a movement up the demand curve to the left

Question 10

An increase in demand

Answer 10

A rise in demand at any given price, causing the demand curve to shift to the right (up)

Question 11

A decrease in demand

Answer 11

A fall in demand at any given price, causes the demand curve to shift to the left (down)

Question 12

Ceteris Paribus

Answer 12

A Latin phrase that means “all other things held constant”

Question 13

What is the inverse relationship between the QD and price?

Answer 13

• When the price rises the QD falls
• When prices fall the QD rises

Question 14

The 6 conditions of demand

Answer 14

• Advertising/branding
• Changes in real/disposable income
• Changes in taste/fashion
• Changes in the price of substitute goods
• Changes in the price of complement goods
• Changes in the population size/distribution

Question 15

How does advertising affect demand?

Answer 15

• The more the product is advertised, the more consumers are aware of it and will demand it more
• There is a direct relationship between branding/advertising & demand
• Advertising increases: demand increase (shifts to the right)
• Advertising decreases: demand decreases (shifts to the left)

Question 16

How does change to the levels of real income affect demand?

Answer 16

• Determines how many goods/services can be enjoyed by consumers
• There is a direct relationship between income & demand for goods/services
• Real income increases: demand increases (shifts right)
• Real income decreases: demand decreases (shifts left)

Question 17

How do tastes and fashion affect demand?

Answer 17

• If goods/services become more fashionable, demand will increase for them (same vice versa)
• There is a direct relationship between consumer tastes and demand for goods/services
• Product becomes more fashionable: demand increases (shifts right)
• Product becomes less fashionable: demand decreases (shifts left)

Question 18

How does the size and distribution of population affect demand?

Answer 18

• When the population size of a country changes over time, so will the demand for products
• There is a direct relationship between population size and demand for goods/services
• Demand will also change if there is a change to the age distribution in a country
  - different ages demand different goods/services e.g an ageing population will buy more hearing aids
• Population increase: demand increases (shifts right)
• Population decrease: demand decreases (shifts left)

Question 19

How does a change in the price of substitutes affect demand?

Answer 19

• Consumers will buy the product which costs less as they provide the same purpose
• There is a direct relationship between the price of substitutes and demand
• Price of substitute increases: demand increases for other product (shifts right)
• Price for substitute decreases: demand decreases for other product (shifts left)

Question 20

How does a change in the price of complements affect demand?

Answer 20

• Complementary goods are bought to be used alongside the original product
• There is an inverse relationship between the price of complementary products and demand
• Price of complementary good increases: demand decreases for other product (shifts right)
• Price of complementary good decreases: demand increases for other product (shifts left)
  - people will buy more of complementary product and so will want more of the other

Question 21

Supply

Answer 21

Supply is the amount of a good/service that a producer is willing & able to supply at a given price in a given time period

Question 22

Individual supply

Answer 22

The supply of a good or service by an individual producer

Question 23

Market supply

Answer 23

The combination of all the individual supply for a good/service
- calculated by adding up the individual supply at each price level

Question 24

Supply curve

Answer 24

slope left to right (upwards)
- y-axis: price
- x-axis: quantity

Question 25

What happens to supply as price rises?

Answer 25

The quantity supplied by producers extends because production becomes more profitable

Question 26

What happens to supply as price falls?

Answer 26

The quantity supplied by producers contracts because production becomes less profitable

Question 27

Movements along the supply curve

Answer 27

If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied (QS)

Question 28

Extension of supply

Answer 28

A movement along the supply curve to the right (higher price & higher quantity supplied) - upwards

Question 29

Contraction of supply

Answer 29

Movement along the supply curve to the left (lower price & lower quantity supplied) - downwards

Question 30

An increase in supply

Answer 30

A rise in supply at any given price, causing the supply curve to shift to the right (downwards)

Question 31

A decrease in supply

Answer 31

A fall in supply at any given price, causing the supply curve to shift to the left (upwards)

Question 32

What 6 conditions effect quantity supplied?

Answer 32

- Cost of production / factors of production - Indirect tax - Subsidies - New technology - Change in the number of firms in the industry - Weather events

Question 33

How does cost of production affect supply?

Answer 33

- If the price of raw materials or other costs of production change, firms respond by changing supply - There is an inverse reaction - Increase COP: decreased supply (shifts left) - Decrease COP: increased supply (shifts right)

Question 34

How does the indirect tax of a country affect supply?

Answer 34

- Any changes to indirect taxes change the cost of production for a firm & impact supply - Increased tax: decreased supply (shifts left) - Decreased tax: increased supply (shifts right)

Question 35

Indirect tax

Answer 35

A tax levied on one party (producers) but passed on to another for payment (consumers)

Question 36

How do subsidies affect supply?

Answer 36

- Changes to producer subsidies directly impact the cost of production for the firm - Subsidy increases: supply increases (shifts right) - Subsidy decreases: supply decrease (shifts left)

Question 37

Subsidy

Answer 37

An amount of money paid by the government to a firm, per unit of output

Question 38

How does new technology generally affect supply?

Answer 38

- New technology increases productivity and lowers costs of production - ageing technology can have the opposite effect - Technology increases: increased supply (shifts right) - Technology decreases: decreased supply (shifts left)

Question 39

How does the number of firms in an industry affect supply?

Answer 39

- The entry and exit of firms into the market has a direct impact on the supply - e.g. if ten new firms start selling building materials in Hanoi, the supply of building material will increase - No. of firms increases: supply increases (shifts right) - No. of firms decreases: supply decreases (shifts left)

Question 40

How do weather events affect supply?

Answer 40

- Droughts or flooding can cause a supply shock in agricultural markets - a drought will cause supply to decrease - unexpectedly good growing conditions can cause supply to increase - Drought: supply decreases (shifts left) - Good weather: supply increases (shifts right)