Demand supply

Question 1

What does a supply demand model show?

Answer 1

“how supply and demand determine prices in a market economy

how prices allocate the economy’s scarce resources”

Question 2

How does the market economy allocate resources?

Answer 2

decentralised decisions of households and firms as they interact in markets for goods and services

Question 3

What is a market?

Answer 3

group of buyers and sellers of a particular good or service

Question 4

What is the characteristic of a perfectly competitive market?

Answer 4

“goods and services are practically identical

buyers and sellers are so numerous that no one can affect the market price

everyone is a price taker”

Question 5

What is quantity demanded?

Answer 5

amount of a good that buyers are willing and able to purchase

Question 6

What is law of demand?

Answer 6

“as the price of good increases, the quantity demanded of a good falls, CETERIS PARIBUS.

Because people respond to changes in cost and benefit”

Question 7

What is a demand schedule?

Answer 7

shows the relationship between the price of a good and the quantity demanded

Question 8

What is quantity demanded in the market/

Answer 8

sum of the quantities demanded by all buyers at each price

Question 9

Explain all non-price determinants of DEMAND

Answer 9

“-number of buyers

• price of related goods
• tastes
• expectations
• income”

Question 10

Explain how change in income affects demand for both inferior and normal good

Answer 10

“demand for a normal good positive related to income

Inferior good:
negatively related to income

increase/decrease in quantity demanded at each price, shift right”

Question 11

Explain how expectations affect demand

Answer 11

“If people expect income to rise, their demand for mealas at expensive restaurants may increase now.

If the economy sours and people worry about their future job security, their demand for new cars may fall now”

Question 12

What is supply?

Answer 12

The quantity supplied of any good is the amount of the good sellers are willing and able to sell.

Question 13

State the law of supply

Answer 13

“As the price of the good increases, the quantity supplied increases, ceteris paribus

as people respond to changes in cost and benefits
benefit increase”

Question 14

What is a supply schedule?

Answer 14

shows the relationship between the price of a good and the quantity supplied

Question 15

What does the supply curve show?

Answer 15

How price affect qunatity supplied, other things being equal

Question 16

What are the non price determinants of supply

Answer 16

”- Number of sellers

• input prices
• technology
• weather
• expectations”

Question 17

How does input prices affect supply?

Answer 17

Fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts right

Question 18

How does technology affect supply?

Answer 18

“Technology determines how many units of input is required to produce a unit of output

• cost saving technological improvement results in fall in input prices and shifts S curve to the right
• it saves time, it speeds up the process
• instead of paying worker an hourly wage and produce 1 unit, now he can produce 100 units
• get more out of unit of labour, 1 unit of labour produceds more output, cost goes down, peopel respond to changes in cost and benefits”

Question 19

How does weather affect supply?

Answer 19

”- important factor in agricultural commodities

• good weather increase harvest”

Question 20

How does expectrations affect supply?

Answer 20

sellers may adjust the supply (of non perishable goods) when their expectations of futre prices changes

Question 21

what is equilibrium and when is it achieved/

Answer 21

“Equilibrium is a state in which opposing forces are balannced so that one is not greater than the otgher.

P has reached the level where Qs = Qd”

Question 22

What happens when sellers face a surplus

Answer 22

“Facing a surplus, sellers lower the price,

• causing Q D to rise and Q S to fall
• reduces the surplus
• where excess surplus has been sold off
• prices continue to fall until the market reaches equilibrium”

Question 23

What happens when there is a shortage

Answer 23

“Facing a shortage, sellers raise the price,
causing Q D to fall and Q S to rise, which reduces the shortage.

• Prices continue to rise until the market reaches equilibrium.”

Question 24

What is the difference between the quantity supplied and supply?

Answer 24

“Quantity supplied: point or numebr on a curve

supply: function that contains quantity supplied”

Question 25

What happens to price and quantity when supply increases, demand increases

Answer 25

“Price: ambiguous(depends on magnitude of shift, don’t need to draw 2 graphs)

Quantity: Increases”

Question 26

What to do when you don’t know whether the outcome of price and quantity is ambiguous with simulatneosu shifts?

Answer 26

drwaw same magnitude shift

Question 27

How to draw the supply curve for housing?

Answer 27

Vertical supply curve

Question 28

In market economies, the _______of a good adjusts to bring the quantity supplied and the quantity demanded into balance.

Answer 28

price

Question 29

These _______are the signals that guide economic decisions and thereby allocate ________ resources.

Answer 29

“price

scarce”