Micro ~ Module 2: Demand and Supply

Question 1

Define veblen goods

Answer 1

Consumers may view higher prices as a sign of better quality (Usually luxury goods).

Question 2

Define speculative goods

Answer 2

When prices go up, investors may believe the prices will continue to increase and thus invest.

Question 3

Define Demand (And Effective Demand)

Answer 3

The desire and willingness to purchase a product at a given price. (Effective demand is when you also have the ability).

Question 4

Define normal goods and inferior goods

Answer 4

When income increases, demand for normal goods increases and demand for inferior goods decreases. And vice versa when income falls.

Question 5

Define supply

Answer 5

Amount of product available to purchase at a given price.

Question 6

Define profit incentive

Answer 6

If the price increases more profit can be made for each unit sold. This incentives entrepreneurs to expand production to increase profits.

Question 7

Define the costs of production

Answer 7

The cost of all the inputs required to make a good.

Question 8

Define direct tax and indirect tax

Answer 8

A direct tax is a tax which is paid directly from an individual to the government, e.g Income tax. Whilst an Indirect tax is a tax which is not paid directly to the government by an individual. e.g Expenditure taxes.

Question 9

Define ad valorem tax and unit tax (examples of indirect taxes)

Answer 9

Ad Valorem tax = the tax paid at a percentage of the price of the product. (VAT rates = 20%)
Unit Tax = the same amount of tax is paid for each unit produced. (Alcohol Duty)

Question 10

Define excess demand and excess supply

Answer 10

When there is either a higher quantity of demand over supply, or supply over demand.

Question 11

Define negative equity

Answer 11

An asset worth less than its purchase price

Question 12

Define derived demand

Answer 12

Demand for a good which is used in the production of another good. (Demand of one good increases, mean the demand for the other good increases as well)

Question 13

Define composite demand

Answer 13

Demand for a good which has two uses.

Question 14

Define joint supply

Answer 14

Supply of one good also leads to the supply of another good.

Question 15

Define consumer surplus

Answer 15

The difference between what a consumer is willing and able to pay for a good or service and actually pay it.

Question 16

Define producer surplus

Answer 16

The difference between how much the producer is willing and able to supply a good or service and they actually get paid.