Demand,Supply & Price Determination In The Markets

Question 1

What is Supply?

Answer 1

• Supply is a schedule of different quantities of a product that a seller (producer) will offer for sale at different prices at a given time and place.
• Supply indicates quantity and price relationship from sellers view point.

Question 2

What is a Supply curve?

Answer 2

• Supply curve schedules quantities supplied at various prices & slopes upward

Question 3

What is Demand?

Answer 3

Buyers will purchase at a given time and place.

• Demand indicates quantity and price relationship from buyers view point.

Question 4

What is a Demand curve?

Answer 4

• Demand curve schedules quantities demanded at various prices & slopes downward

Question 5

What is meant by Market Equilibrium?

Answer 5

Price is established at the intersaction of supply & demand curves & changes because these curves shift

Question 6

What is Market Supply?

Answer 6

Market supply is a horizontal summation of all the firm supply curves,or the quantity each firm would be willing and able to supply for a specific price.

Question 7

What are the factors that change Product Supply?

Answer 7

Pa = the prices of alternative products
that compete for the same production resources
 Pi = the price of inputs in production process
 ΔT = the change in production technology
Number of sellers
Expectations about future prices
Taxes and subsidies

Question 8

What is Market Demand?

Answer 8

Market demand is the summation of quantities demanded by individual consumers at a given market price.

Question 9

What are factors that change Consumer Demand?

Answer 9

I = Consumer’s Income
Ps = the price of related products (substitutes & compliments)
Expectations about future prices
T = Consumer’s tastes & preferences lamb

Question 10

What is meant by Tastes and Preferences?

Answer 10

• Consumers tastes & preferences cannot be entirely explained by economic relationships of prices & incomes
• Marketing activity’s economic objective is to
1) to move demand curve to the right
2) to make it more inelastic (insensitive to price) i.e. D1 to D2

Question 11

What happens when there is a shift in the Supply Curve?

Answer 11

If there is a shift in the supply curve, the impact on price depends on the elasticity of demand – the less elastic the demand is, the greater the impact on price

Question 12

What is the Price Elasticity of Demand?

Answer 12

• Price elasticity of demand (PED) is the measure of sensitivity (responsiveness) of quantity demanded to a price change.

Question 13

What is meant by the Slope of a Relationship?

Answer 13

• We can measure the influence of one variable on the other by
the slope of the relationship.
• We use the Greek letter Δ (delta) to represent ‘change in’.
• For example Δ Q means the change in the value of variable on one x-axis on the value of Δ P variable measured on the y- axis.
PED + %Q/ %P
Please note that the slope of a straight line is constant but the price-quantity changes as we move along the line.
PED 

Question 14

What are factors that affect Price Elasticity of Demand?

Answer 14

•Substitutes:
a) inelastic if no close substitute e.g. fluid milk, eggs
b) Elastic if close substitutes e.g. Beef, lamb, pork, chicken
• Necessities: inelastic as no real substitute e.g. Salt
•Luxuries: elastic
e.g. Lobsters, crab, caviar
•Time: Buyers may locate substitutes so elastic in the short run but may revert to old purchase pattern in the long run
Commodities are perfectly elastic at farm level as farmer A’s wheat is 100% substitutable for farmer B’s wheat. Therefore price takers.

Question 15

What is the Cross Price Elasticity of Demand?

Answer 15

• Cross price elasticity of demand (XED) is the response of change in price of one product on the quantity demanded of another product
XED = %Q/a %Pb

Question 16

What is a Substitute?

Answer 16

Substitute if sign is +ive
e.g. If price of beef goes down (- %P), its consumption will increase, and the consumption of lamb will also decrease (-%Q) (as they are substitutes)

Question 17

What is a Compliment?

Answer 17

Complement if sign is
–ive e.g. If price of bread goes down (- %P), its consumption will increase, as will the consumption of butter also increase (+%Q) (as they are complements)

Question 18

What is the Elasticity of demand?

Answer 18

• Elasticity of supply (ES) is the measure of sensitivity (responsiveness) of quantity supplied to price change.

Question 19

What are factors that affect Elasticity of Supply

Answer 19

• Alternatives: More alternatives, greater the suppliers responsiveness (elasticity) to switch production
• Time: Supply more responsive (elastic) in the long term & inelastic in the very short term
• Perishability / storability i.e. Supply of perishable products is inelastic as need to sell quickly. Storage makes short-run supply elastic
• Market structure : More competitive markets are more responsive to price change