Demand & Supply + Elasticity

Question 1

Define what is meant by a market?

Answer 1

A group of buyers and sellers of a particular good or service

Question 2

Within a market what do buyers determine?

Answer 2

Buyers determine Demand

Question 3

Within a market what do sellers determine?

Answer 3

Sellers determine supply

Question 4

What defines a competitive market?

Answer 4

A market in which there are many buyers and many sellers so that each has a negligible impact on the market place

Question 5

What are the two identifiers of a Perfect Competitive market?

Answer 5

1) The goods offered for sales are all exactly the same

2) the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price

Question 6

Define what is meant by Quantity Demand

Answer 6

The amount of a hood that buyers are willing and able to purchase

Question 7

State what the law of Demand is

Answer 7

The claim that other things being equal, the quantity demanded of a good falls when the price of a good rises

Question 8

What is the table called that you would use to display the price of a good and the quantity demanded?

Answer 8

Demand curve on a Demand Schedule

Question 9

What is meant by the phrase “Ceteris Paribus” and what is its importance?

Answer 9

Other thing being equal. Reminder that all variables other than the ones being studied are assumed to be constant

Question 10

What has happened when we see a shift of the demand curve to the right?

Answer 10

A shift in the demand curve to the right is a result of an increase in quantity demanded at a given price. e.g ice cream is demanded more during hot weather

Question 11

What are the effects of increased income on a normal good?

Answer 11

An increase in income leads to an increase in the quantity demanded of a normal good

Question 12

What are the effects of an increase income on a Inferior Good?

Answer 12

An increase of income would see a decrease in the quantity demanded of a inferior good

Question 13

What is meant by the term substitutes, when referring to Demand?

Answer 13

Two goods for which a decrease in the price of one good leads to a decrease in the demand for the other good. e.g coke & pepsi

Question 14

What is meant by the term complements, when referring to Demand?

Answer 14

Two goods for which a decrease in the price of one good leads to an increase in the demand for the other good. E.g. cream & hot chocolate

Question 15

What is meant by “Quantity Supplied”?

Answer 15

The amount of a good that sellers are willing and able to sell

Question 16

Define the Law of Supply

Answer 16

The claim that at Ceteris paribus that quantity supplied of a good rises when the price of a good raises

Question 17

What are the four main reasons that will see a shift in quantity of supply

Answer 17

Input price
Technology
Expectations
Number of sellers

Question 18

What is meant by “input price” in regards to the supply curve

Answer 18

Any change in the cost of production will see a shift of the supply charge

Question 19

You produce ice cream, the price of sugar has dropped, explain the effects if any to the supply curve.

Answer 19

The supply curve will shift to the right as sugar is an in put of ice cream making it cheaper to produce

Question 20

State what the “Law of supply and demand” is

Answer 20

The claim that a good at any price adjusts to bring the supply & demand of that good into balance

Question 21

What does the term Equilibrium mean?

Answer 21

A situation in which supply and demand are at rest

Question 22

What is the Equilibrium Price?

Answer 22

The price that balances quantity supplied and quantity demanded

Question 23

What is meant by the term “Surplus” in reference to supply and demand?

Answer 23

Goods supplied exceeds the quantity demanded

Question 24

What is meant by the terms “shortage” in reference to supply and demand?

Answer 24

Quantity demanded exceeds the quantity supplied

Question 25

What are the three steps for analyzing changes to the equilibrium

Answer 25

1) Decide if the event shifts, supply, Demand, or both 2) Decide if the curve shifts right or left 3) Create a Supply and Demand curve to compare initial and new equilibrium

Question 26

What is the difference between "supply" and "quantity supplied"

Answer 26

Supply refers to the position on the supply curve where as quantity supplied refers to the amount suppliers wish to sell

Question 27

When would you see movement along the supply or demand curve

Answer 27

When we see a change in quantity supplied or demanded due to the investigating determinate e.g price change

Question 28

What is meant by the term "Elasticity"?

Answer 28

A measure of responsiveness of quantity demanded or quantity supplied to one of its determinants

Question 29

What is price elasticity of demand?

Answer 29

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

Question 30

What is meant by the term "elastic" when we refer to supply and demand?

Answer 30

The quantity demanded and supplied responds largely to changes in price

Question 31

What is meant by the term "inelastic" when we refer to supply and demand?

Answer 31

The quantity demanded and supplied responds only slightly to changes in price

Question 32

How do you calculate Elasticity of demand & supply?

Answer 32

Elasticity= % Change in quantity / % change in price

Question 33

What form of elasticity does a calculation of 1 illustrate

Answer 33

Unit Elastic

Question 34

What form of elasticity does a calculation of greater than 1 illustrate

Answer 34

Elastic demand or supply

Question 35

What form of elasticity does a calculation of less than 1 illustrate

Answer 35

Inelastic demand or supply

Question 36

What form of elasticity does a calculation of 0 illustrate

Answer 36

Perfectly inelastic demand or supply

Question 37

What shape does a perfectly inelastic demand curve show

Answer 37

Vertical

Question 38

At infinity, what is the level is elasticity

Answer 38

perfectly elastic

Question 39

Is a good that has many close substitutes more likely to an elastic or inelastic demand?

Answer 39

Elastic, consumers are likely to purchase substitutes if the price raises

Question 40

Is a necessity more likely to have a elastic or inelastic demand?

Answer 40

Inelastic demand

Question 41

Is a broadly defined market more likely to an elastic or inelastic demand?

Answer 41

elastic, many perfect substitutes

Question 42

How does time effect the elasticity of a market?

Answer 42

Goods tend to become more elastic over time as the market has more time to adjust.

Question 43

What is meant by Unit Elasticity?

Answer 43

When percentage change in quantity equals percentage change in price

Question 44

What formula should you use when calculating the elasticity?

Answer 44

The mid point method

Question 45

What is total revenue in a market?

Answer 45

The amount paid by buyers and received by sellers of a good

Question 46

How do you calculate total revenue in a market?

Answer 46

Price x quantity

Question 47

What is meant by Income elasticity of demand?

Answer 47

A measure of how much the quantity demanded of a good response to a change in consumer income.

Question 48

How do you calculate income elasticity of demand?

Answer 48

Percentage change in Q / Percentage change in income

Question 49

What is meant by cross elasticity of demand?

Answer 49

A measure of how much the quantity demanded of one good responds to a change in price of another good.

Question 50

How do you calculate cross price elasticity of demand?

Answer 50

Percentage change in Q of good 1 / Percentage change in p of good 2

Question 51

Does a substitute have a positive or negative cross price elasticity of demand?

Answer 51

Positive - because prices of both items & quantity demanded move in the same direction

Question 52

Does a complement have a positive or negative cross price elasticity of demand?

Answer 52

Negative- because used together the price increase on one results in the quantity demanded of the other reducing.

Question 53

What is a price ceiling?

Answer 53

A legal maximum on the price at which a good is sold

Question 54

What is a price floor

Answer 54

A legal minimum on the price at which a good can be sold

Question 55

When is a price ceiling binding?

Answer 55

The price ceiling is binding when it is set below the equilibrium price as it becomes a binding constraint on the market

Question 56

When is a price floor binding?

Answer 56

A price floor is binding when it is set above the equilibrium price

Question 57

What is the affect of a binding price ceiling on supply?

Answer 57

Shortage- the level of demand is higher than the level of supply

Question 58

What is the affect of a finding binding price floor?

Answer 58

Surplus- the level of supply is greater than the level of Q demanded.

Question 59

What are the negative affect of of both surplus and shortage?

Answer 59

They cause market inefficiencies such as; Shortage - long lines

Question 60

What is meant by the term “tax incidence?

Answer 60

The study of who bears the burden of taxation

Question 61

What are the three steps for deciding how a tax on buyers affect the market outcomes

Answer 61

1) Decide wether the law affects the supply or demand curve 2) Decide which way the curve shifts 3) illustrate the changes in a S&D graph to examine the affects on the equilibrium

Question 62

What are the implications of taxation?

Answer 62

Both buyers and sellers share the burden of a tax - sellers receive less for a good - Buyers pay more for each good

Question 63

What are the affects of tax on a market?

Answer 63

Tax discourages market activity by reducing the quantity of a good sold.

Question 64

What is meant by the term “wedge” in reference to tax and subsidy

Answer 64

A wedge is the gap between what the buyer pays and what the seller receives

Question 65

What role does market elasticity play in regards to the burden of a tax

Answer 65

The burden of the tax falls more heavily on the side of the market that is less elastic as they have fewer good alternatives

Question 66

What is the definition of the term “subsidy”?

Answer 66

A payment from government to consumers or sellers for each unit of a good being bought or sold

Question 67

Why do Government use subsidies?

Answer 67

Used to encourage production and consumption

Question 68

Why do governments use tax’s

Answer 68

To reduce production or consumption

Question 69

How do you calculate the affects of a subsidy on a market

Answer 69

Use the 3 steps for analysing supply and demand 1) does it affect supply or demand 2) what way does the curve shift 3) illustrate the changes

Question 70

What are the implications of a subsidy?

Answer 70

1) Subsidy creates a wedge between price paid by consumers and price recover by sellers 2) benefit is shared between buyer and seller 3) costly for govt, have to be recouped through taxation