Demand Supply and Price

Question 1

Normal goods

Answer 1

Goods which people will demand more of if their real income increases (DVDs)

Question 2

Inferior Goods

Answer 2

Goods which people demand less of if their real income increases

Question 3

demand definition

Answer 3

Ability and willingness to but a good at a given price at a given time

Question 4

derived demand

Answer 4

Demand for one good used in making something else

Question 5

Composite demand

Answer 5

Some goods have multiple uses, demand change for that good can lead to supply changes for other goods

Question 6

Complementary goods

Answer 6

Goods often used together so have joint demand

Question 7

How will equal distribution of income affect luxury goods

Answer 7

Demand will decrease as there is fewer rich people who can afford luxury items

Question 8

substitute goods

Answer 8

goods which are alternatives to each other so an increase in price for one leads to a rise in demand for the other

Question 9

What causes movement along the demand curve

Answer 9

price changes

Question 10

What can cause demand to shift

Answer 10

• Price increase leads to demand decrease
• Population increase lads to demand increase
• Income increase leads to demand increase
• Substitute and complement goods
• Increased Advertising leads to increase demand
• Speculation
• Seasonality
• Government legislation

Question 11

Diminishing marginal utility

Answer 11

Satisfaction derived from consumption of an additional unit of the good will decrease as more of the good is consumed

Question 12

Why does demand curve slope downwards

Answer 12

Inverse relationship between price and quantity demanded

Question 13

Marginal utility

Answer 13

Satisfaction gained from the consumption of the next unit of the good

Question 14

Supply definition

Answer 14

Ability and willingness to provide a good or service at a given price at a given time

Question 15

What can cause supply to shift

Answer 15

• If cost of production increases supply decreases
• Competitive and composite supply
• Agricultural goods are particularly weather dependent
• New technology is more efficient which increases supply
• Government legislation
• ## Taxes and subsidies can affect supply

Question 16

Why is supply upwards sloping

Answer 16

because as price increases firms are willing to supply more as they make more profit

Question 17

Market Clearing Price

Answer 17

Where supply is equal to demand, the equilibrium the market is cleared

Question 18

How to show excess demand on the graph

Answer 18

Put price below equilibrium and it is the triangle above price

Question 19

How to show excess supply on the graph

Answer 19

Put price above the graph and it is the triangle below

Question 20

price mechanism

Answer 20

forces of demand and supply interacting to influence price and then the quantity sold

Question 21

signalling function

Answer 21

changes in price shows how demand and supply are so signals to consumers and producers how to act.

Question 22

rationing function

Answer 22

high demand and low supply due to scarce resources can cause price to rise. Restricts the good to those with higher incomes who can afford to pay high price.

Question 23

incentive function

Answer 23

higher prices act as an incentive to encourage firms to increase production and increase supply with incentive of more profits.

Question 24

advantages of the price mechanism

Answer 24

• resources will be allocated efficiently
• no cost of regulation
• market caters to consumers preference
• prices are kept to minimum as resources are used efficiently

Question 25

Disadvantages of the price mechanism

Answer 25

- Inequality is likely - Under provision of merit goods - people with low skills will be unemployed or low wages - Public goods aren't produced

Question 26

Example of the price mechanism in the local market

Answer 26

coronavirus disrupted food supply chains, so local UK supermarkets have less supply of some foods which increases price, this rations out the section of demand which doesn't value the food highly enough to pay the higher price

Question 27

Example of price mechanism in the national market

Answer 27

price of housing is more expensive in London, this rations off demand to only those who can afford it, also gives incentive to companies to build houses in London due to the high prices

Question 28

example of price mechanism in the global market

Answer 28

Organisation for petroleum exporting countries restricted oil supply, this raised prices greatly rationing out only the richest countries to be able to afford oil