Lecture - demand supply and market equilibrium.docx

Question 1

What is demand?

Answer 1

The amount that will be bought at any given price per unit of time

Effective demand includes a want supported by the willingness and ability to pay the price.

Question 2

What does the demand curve illustrate?

Answer 2

The quantities demanded at any given price, assuming other factors remain constant (ceteris paribus)

It shows a downward slope, indicating an inverse relationship between price and quantity demanded.

Question 3

What is the Law of Demand?

Answer 3

As price rises, quantity demanded falls; as price falls, quantity demanded rises.

Question 4

What factors can cause shifts in the demand curve?

Answer 4

• Tastes
• Advertising
• Income
• Price of substitution goods
• Price of complementary goods
• Expectations of future price changes
• Availability of credit

Question 5

What is meant by effective demand?

Answer 5

A want supported by the willingness and ability to pay the price.

Question 6

What happens when there is an increase in demand?

Answer 6

More is demanded at each and every price.

Question 7

What is a Giffen good?

Answer 7

A low-income, non-luxury product for which demand increases as the price increases.

Question 8

What is supply?

Answer 8

The quantity of a good or service that firms are willing to supply to the market at a certain price over a certain period of time.

Question 9

What does the supply curve illustrate?

Answer 9

The relationship between price and the quantity supplied, typically sloping upwards from left to right.

Question 10

What causes movements along the supply curve?

Answer 10

Changes in the price of the good or service, while other factors remain the same.

Question 11

What factors can cause shifts in the supply curve?

Answer 11

• Costs of production
• Availability of resources
• Climate
• Government regulation
• Taxes and subsidies
• Price of other goods the producer could supply

Question 12

What is market equilibrium?

Answer 12

The state when the quantity that producers want to offer for sale is exactly the same as the quantity consumers want to purchase.

Question 13

What is the equilibrium price?

Answer 13

The price at which the demand and supply curves intersect, resulting in no excess demand or supply.

Question 14

What occurs when the market price is below the equilibrium price?

Answer 14

Excess demand occurs, leading to a rise in market prices.

Question 15

What occurs when the market price is above the equilibrium price?

Answer 15

Excess supply occurs, leading to a fall in market prices.

Question 16

What is the impact of an increase in demand on equilibrium price and quantity?

Answer 16

Both equilibrium price and quantity increase.

Question 17

What is the impact of a decrease in supply on equilibrium price and quantity?

Answer 17

Equilibrium price increases, but equilibrium quantity decreases.

Question 18

What is utility in economic terms?

Answer 18

The satisfaction derived from the consumption of some good or service.

Question 19

What does the law of diminishing marginal utility state?

Answer 19

As the quantity consumed of any commodity increases, the marginal utility derived from each additional unit decreases.

Question 20

Fill in the blank: A good that experiences an increase in demand when its price rises is known as a _______.

Answer 20

Giffen good.

Question 21

True or False: The demand curve can shift due to changes in consumer income.

Answer 21

True.

Question 22

True or False: An increase in the price of complements will lead to an increase in demand for a good.

Answer 22

False.

Question 23

What is the relationship between price and quantity supplied?

Answer 23

Typically direct; as prices rise, supply increases.

Question 24

What happens to supply when production costs decrease?

Answer 24

Supply increases, shifting the supply curve to the right.

Question 25

What is defined as the additional utility derived from the last unit consumed?

Answer 25

Marginal utility ## Footnote Marginal utility reflects the change in satisfaction from consuming one additional unit of a good.

Question 26

What does the law of diminishing marginal utility state?

Answer 26

As the quantity consumed of any commodity increases, the marginal utility decreases ## Footnote This principle explains why consumers may not be willing to pay as much for additional units of a good.

Question 27

What does price measure in the context of utility?

Answer 27

Sacrifice ## Footnote Price indicates what other goods or services could have been obtained with the money spent.

Question 28

What happens to consumer behavior when the price of a good is lowered?

Answer 28

Consumers are tempted to buy more of the good ## Footnote This is due to the diminishing marginal utility and increased willingness to purchase at lower prices.

Question 29

What is disposable income?

Answer 29

Income after the deduction of income tax and national insurance contributions ## Footnote This is the amount available for spending or saving after taxes.

Question 30

What is real income?

Answer 30

Measures the purchasing power of income, taking inflation into account ## Footnote Real income reflects the actual amount of goods and services that can be purchased with income.

Question 31

What is the income effect?

Answer 31

As price falls, it effectively increases real disposable income ## Footnote This leads to more money available for additional purchases.

Question 32

What does the substitution effect refer to?

Answer 32

A fall in the price of a commodity leads to a transfer of demand from relatively dearer commodities ## Footnote Consumers will switch to the cheaper option when prices change.

Question 33

What are normal goods?

Answer 33

Goods for which demand increases as income rises ## Footnote Examples include luxury items or brand-name products.

Question 34

What are inferior goods?

Answer 34

Goods for which demand decreases as income rises ## Footnote Examples include low-quality items that consumers buy when they have less money.

Question 35

What effect does advertising have on demand?

Answer 35

Successful advertising increases demand for a good at all prices ## Footnote It can shape consumer perception and increase desirability.

Question 36

How does the price of substitute goods affect demand?

Answer 36

A change in the price of one commodity affects the demand for its substitutes ## Footnote For example, if the price of Pepsi rises, demand for Coke may increase.

Question 37

What are complementary goods?

Answer 37

Goods that are consumed together and jointly demanded ## Footnote Examples include gin and tonic; a price decrease in one can increase demand for the other.

Question 38

What happens to consumer behavior if people expect future price increases?

Answer 38

They are likely to buy more now before prices rise ## Footnote This behavior reflects anticipation of scarcity or higher costs.

Question 39

How does the availability of credit affect demand?

Answer 39

Increased access to hire purchases and bank loans raises demand for goods and services ## Footnote Easier credit can lead to more consumer spending.