Chapt 2 Theory Of Demand & Supply

Question 1

Quantity demand vs Demand

Answer 1

Quantity demand
- affected by **price ** factors

Demand
- Affected by non-price factors

Question 2

Factors affecting demand

Answer 2

EYPTO or EGYPT PIE

E — expectations in future price changes
Y — Income of consumers
P — Price of related goods (substitutes, derived demand, complements)
T — taste & preferences of consumers
O — others (Seasonal factors, population changes, availability of hire purchases)

P — population changes
I — Interest changes
E — Exchange rates

Question 3

Define market

Answer 3

Market is an arrangement whereby buyers and seller, motivated by self-interest, interact to exchange goods & services

Consumers: Maximise utility / satisfaction.

Producers: Maximise profits

Question 4

Define demand

Answer 4

Demand is:
- the amount of goods or service that consumers are able and willing to buy
- At various prices over a given period of time

• ceteris paribus

Question 5

Why assume ceteris paribus

Answer 5

To isolate the relationship between 2 variables.

• It assumes all other factors remain constant.

Question 6

What is the Law of demand

Answer 6

It states that within a given period of time, the QD of a good or service is inversely related to its price.

• the higher the price, the lower the QD

Question 7

What is the LDMU

Answer 7

Law of Diminishing Marginal Utility

• States that with each additional unit of a good consumed,
• the additional satisfaction from consuming that extra unit diminishes

Question 8

Explain the shape of the demand curve using the LDMU

Answer 8

demand curve: Downward sloping

• The marginal benefit of consuming 1 additional unit of the good falls.
• Consumers are only willing to pay a lower price for the good.
• So price must fall to induce the consumer to buy more due to their diminishing marginal utility

Hence, inverse relationship between price & QD

Question 10

Non-price factors affecting supply

Answer 10

WET PIGS

W — Weather changes
E — Expectations of future price changes short term factor
T — Tech
—
P — Price of related goods
I — Prices of factor input
G — Govt policies
S — Suppliers number of them

Question 11

Non-price factors for supply
WEATHER CHANGES

Answer 11

Eg:
- Climate change affecting harvests for apples
- Conditions not optimal
- Droughts / floods
- Producers may try to mitigate the changes

Question 17

What is Allocative efficiency ?

Answer 17

Allocative efficiency implies that there is an optimal amount of each good & service being produced and consumed
__
- At allocative efficiency, societal welfare is maximised
- Highest combined benefit for BOTH consumers and producers
___
- Allocative efficiency occurs when total surplus is max ,
- when total surplus is so high that change in Equ output does not change total surplus

Question 18

Define consumer surplus. Where is CS on the graph?

Answer 18

Consumer surplus (CS) is the difference between the price a consumer is willing & able to pay for a good/service and the actual price paid for the good
________________________
Graph;”:
- CS is below demand curve
- & above price line

Question 19

Define producer surplus. Where is PS on the graph?

Answer 19

producer surplus (PS) is the diff between what the producer is willing and able to accept for supplying a good/service and the actual price received from the good.

________________________
Graph;”:
- PS is Above supply curve
- & below price line