Chapter 3: Determining Equilibrium Market Price

Question 1

What is the difference between ‘want’ and ‘demand’?

Answer 1

Want:

• Want is just a desire.

Demand:

• Demand is willingness (want) supported by purchasing power.

Question 2

What is ‘demand’?

Answer 2

Demand refers to the quantities of a good a consumer is willing and able to buy at all given prices over a period of time.

• It refers to the whole price-and-quantity demanded relationship.
• It is represented by a demand schedule / demand curve.

Question 3

What is ‘quantity demanded (Qd)’?

Answer 3

Quantity demanded refers to the quantity of a good a consumer is willing and able to buy at a particular price.

• It refers to one specific quantity related to one specific price.
• It is represented by a number / point on the demand schedule / demand curve at the particular price.

Question 4

What is the difference between ‘quantity demanded’ and ‘quantity transacted’?

Answer 4

Demand and quantity demanded are planned only.

Quantity demanded:

• Quantity demanded is the quantity a consumer plans to buy at a given price.

Quantity transacted:

• Quantity transacted is the quantity a consumer actually buys.

Question 5

How do we obtain ‘market demand’?

Answer 5

‘Market demand’ is obtained by horizontal summation, i.e. the summation of quantities demanded of all consumers at all given prices.

Question 6

What is ‘the law of demand (需求定律)’?

Answer 6

Definition:

• The law of demand states that a decrease in price of a good will result in an increase in its quantity demanded, and vice versa, ceteris paribus.

Explanation:

• The law of demand is represented by a downward sloping demand curve.
• It illustrates a negative (inverse) relationship between price and the quantity demanded for the good.
  i.e. If Price ↑/↓, it results in a ↓/↑ in Qd

Question 7

What is ‘supply’?

Answer 7

Supply refers to the quantities of a good a seller is willing and able to sell at all given prices over a period of time.

• It refers to the whole price-and-quantity supplied relationship.
• It is represented by a supply schedule / a supply curve.

Question 8

What is ‘quantity supplied (Qs)’?

Answer 8

Quantity supplied refers to the quantity of a good a seller is willing and able to sell at a particular price.

• It refers to one specific quantity related to one specific price.
• It is represented by a number / a point on the graph at the particular price.

Question 9

What is the difference between ‘quantity supplied’ and ‘quantity transacted’?

Answer 9

Supply and quantity supplied are planned only.

Quantity supplied:

• Quantity supplied is the quantity a seller plans to sell at a given price.

Quantity transacted:

• Quantity transacted is the quantity a seller actually sellers.

Question 10

How do we obtain ‘market supply’?

Answer 10

‘Market supply’ is obtained by horizontal summation, i.e. the summation of quantities supplied of all sellers at all given prices.

Question 11

What is ‘the law of supply (供應定律)’?

Answer 11

Definition:

• The law of supply states that an increase in price of a good will result in an increase in its quantity supplied, and vice versa, ceteris paribus.

Explanation:

• The law of supply is represented by a upward sloping supply curve.
• It illustrates a positive relationship between price and the quantity supplied for the good.
  i.e. If Price ↑/↓, it results in a ↑/↓ in Qs

Question 12

What is ‘market equilibrium’?

Answer 12

Definition:

• Market equilibrium refers to a state when the market Qd equals the market Qs, and there is no tendency for the price to change.

Diagram: Refer to notes p.12

Question 13

What is ‘equilibrium price’
(marketing clearing price)?

Answer 13

Equilibrium market price is attained when the quantity demanded = quantity supplied.

Question 14

What is ‘quantity transacted’?

Answer 14

Quantity transacted is the actual quantity that is being traded, i.e. it is the quantity being bought and sold.

Question 15

What is ‘total revenue / total expenditure’?

Answer 15

Total revenue / Total expenditure is calculated by multiplying price with quantity transacted.

• It is represented by a rectangular area in a demand-supply diagram.

Question 16

What is ‘market disequilibrium’?

Answer 16

Market disequilibrium refers to a state when the market quantity demanded is not equal the market supplied.

Two possible situations of market disequilibrium:

1. When price is below the equilibrium level (shortage / excess demand)
2. When price is above the equilibrium level (surplus / excess supply)

Question 17

What will happen when price is below the equilibrium level?

Answer 17

Diagram: Refer to note p.14

When market price is below the equilibrium level, quantity demanded will be larger than the quantity supplied.
Excess demand / Shortage arises.

• If price is raised, Qd will decrease and Qs will increase.
  With the size of shortage reduces, equilibirum can be restored eventually.

Question 18

What will happen when price is above the equilibrium level?

Answer 18

Diagram: Refer to note p.15

When market price is above the equilibrium level, quantity demanded will be smaller than the quantity supplied.
Excess supply / Surplus arises.

• If price is lowered, Qd will increase and Qs will decrease.
  With the size of surplus reduces, equilibirum can be restored eventually.

Question 19

How to illustrate the labour market in demand-supply model?

Answer 19

Refer to notes p.16

Wage rate is the price of labour services.

• By putting demand for labour (forces of employers) and supply of labour (employees) together we can obtain the equilibrium wage rate.

Question 20

What is ‘nominal price’?

Answer 20

Nominal price is the price of a good expressed in terms of money.

Question 21

What is ‘relative price’?

Answer 21

Relative price is the price of a good expressed in terms of another good.

Calculation formula:
Relative price of good A in terms of good B

• = Price of good A / Price of good B

Question 22

What do we apply the law of demand in relative price changes?

Answer 22

When the relative price of Good X in terms of Good Y increase,

• According to the law of demand, relatively less Good X will be consumed.

When the relative price of Good X in terms of Good Y decrease,

• According to the law of demand, relatively more Good X will be consumed.

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When a fixed cost (lump sum) is added to the prices of high-quality and low-quality goods,

• The relative price of the high-quality goods will decrease.
• According to the law of demand, people will consume / buy relatively more of the high-quality goods.

When a fixed cost (lump sum) is removed from the prices of high-quality and low-quality goods,

• The relative price of the low-quality goods will decrease.
• According to the law of demand, people will consume / buy relatively more of the low-quality goods.

Question 23

What do we apply the law of demand using non-money cost?

Answer 23

It can be used to explain / predict any behavious when non-pecuniary costs change.

• According to the law of demand, when the cost (money / non-money cost) of an action (behaviour) ↑/↓, the frequency of that action (behaviour) will ↓/↑.