Supply And Demand

Question 1

What is supply and demand

Answer 1

S/D affect price of something i.e share price

Supply - amount available to a market / limited at particular time therefore affects price

Demand - amount consumers/ investors want to buy at particular price

Question 2

Outline 3 laws of supply and demand

Answer 2

1) lower price the greater demand

• demand curve (slops down from L to R)
• exceptional demand curve slips upwards (reflects demand of commodity greater at higher price - shares)

Question 3

Outline 3 laws of supply and demand

Answer 3

2) Higher price the greater supply

• supply curve slopes up L - R
• co issues set number of shares to be traded on stock market required by quotation rules, if demand strong co issues more at higher price to raise capital for investments/ acquisitions

Question 4

Outline 3 laws of supply and demand

Answer 4

3) Equilibrium price when S/D equal

• at this price, same quantity supplied as us demanded
• both quantity demanded and quantity supplied of item will vary with price, equilibrium price both forces balanced
• if equilibrium price correct in market there’s enough available to satisfy demand (buyers can purchase and sellers can dispose of stock)

Higher price = sellers left items unsold
Lower price = demand will excess supply/ shortage of items

Market price = equilibrium price equals actual price due to temporary influences of forces of S/D

Long term equilibrium price becomes normal price where rate of production and consumption equal

Question 5

What is elasticity of demand

Answer 5

Degree of responsiveness of demand and supply relating to price change

• if there’s small change to price results in large change in demand = demand is elastic
• if there’s large change to price results in little difference to demand = demand is inelastic

Perfect inelastic = same quantity demanded whatever the price change

Question 6

How to measure elasticity of demand

Answer 6

Look at change in price vs change in demand

Q/P

> 1 Elastic
<1 Inelastic

Where change in price brings corresponding change in demand elasticity of demand is equal to unity

Elasticity greater to unity where result in price change leads to greater change in demand

Elasticity less than unity when result in price change leads to less change in demand

Elasticity perfect = elasticity equals infinity
Inelasticity perfect = elasticity equals zero

Question 7

Factors that influence responsiveness of demand to price changes

Answer 7

Degree of necessity

• whether item necessity of luxury
• expensive item may be inelastic due to fact there’s no substitutes
• items rice, bread, potatoes inelastic bc lack of substitutes rather than luxury

Possibility of substitution
-commodity must be in same price range

Consumers income

• people higher disposal income likely inelastic in their demand for most items
• people make choices for items due to limits on income
• inelastic products considered necessities rather than luxury

Cheap items
-smaller proportion income expensed on item = inelastic demand for it

Habit
-purchasing habits difficult to change immediately even if price rises (tobacco is inelastic demand)