Price Theory

Question 1

Define price theory

Answer 1

an economic theory that states that the price for a specific good or service is determined by the relationship between its supply and demandat any given point.

Question 2

Define the term price theory

Answer 2

an economic theory that states that the price for a specific good or service is determined by the relationship between its supply and demandat any given point

Question 3

Define demand

Answer 3

Demand can be defined as the quantity of goods and services that consumers arewillingandableto purchase at different prices.

Consumers must want the product or the service and they must be able to pay for the product or the service at the price that the seller is asking.

Question 4

Factors affecting demand

Answer 4

Income of consumers, price of substitute, price of complements, changes in taste /fashion, seasonal, advertising and price

Question 5

Income of consumers

Answer 5

The amount of goods or services that consumers are able to buy depends on their income.

If consumers’ incomes are higher, they will buy more of a product and if their incomes are low they will buy less.

Question 6

Price of substitute

Answer 6

A substitute product is a product that can be used in the place of another.

When the demand of a substitute productincreases, demand for the original product willdecrease.

When the demand for a substitute productdecrease, the demand for the original product willincrease.

If the price of product increases, consumers will consume more of the substitute product.

Question 7

Price of complements

Answer 7

A complementary product is a product that adds value to another. The consumer will need consumer another product in order to use another. E.g A DVD player and a CD.

The prices of a complementary product may also affect the demand of the original product.

If the price of petrol increases the demand for cars will decrease.

Question 8

Change in taste/fashion

Answer 8

Fashion and trends influence how much of a product, consumers will purchase.

When a product is fashionable the demand for it will increase.

When consumers lose interest or taste in the product, the demand for that product will decrease.

Question 9

Seasonal or weather conditions

Answer 9

The weather conditions can also affect the quantity of a product that consumers buy.

In winter the demand for winter clothes will increase but in summer the demand for winter clothes will decrease while the demand for summer clothes increases.

Question 10

Advertising

Answer 10

The advertising of a product will determine how much of the product consumers will purchase.

If the advertising is effective consumers will purchase more of the product.

If there is no advertisement, consumers will demand less of the product.

Question 11

Price of the product

Answer 11

The quantity of the product which consumers buy depends on the price of the product.

If the price of a product is low consumers will buy more of the product and if the price higher consumers will buy less of the product.

Question 12

The law of demand

Answer 12

The law of demand states that the higher the price of a good or a service, the lower the quantity demanded by consumers.

There is an inverse relationship between the price of a product and the quantity demanded, meaning as the price increases demand decreases and vice versa ceteris paribus. (all other things remaining equal.)

Question 13

demand schedule

Answer 13

A demand schedule is a table that clearly shows the quantity demanded of a good at different price level.

When given the price level, it is easy to determine the expected quantity demanded.

Question 14

Demand curve

Answer 14

A demand curve is graph showing the quantity of goods and services that are willing and able to purchase at different prices.

A demand curve is created by plotting the data from the demand schedule on the graph.

Question 15

Supply

Answer 15

Supply is defined as the quantity of good or service that suppliers are willing and able to supply at different price levels.

Question 16

Factors affecting supply

Answer 16

Number of producers, method of production, cost of production, price of the product

Question 17

Cost of production

Answer 17

The quantity of a good or a service that suppliers produce depend on the cost of producing the good or service.

If the good or the service is cheap to produce, suppliers will supply a large quantity of the good.

If the cost of production increases, suppliers will supply or produce less of the product.

Question 18

Method of production/state of technology

Answer 18

The quantity of goods and services supplied depends on the method of production and the state of the technology.

If there is technological improvement that enables a greater quantity of products to be supplied then the supply of the product will increase.

Question 19

Price of product

Answer 19

The quantity of a product or service that suppliers provide depends on the price that consumers will pay for the product or the service.

If the price is higher, suppliers will supply more of the good or the service.

If the price is low, suppliers will decrease the quantity they supply and find more profitable goods to produce.

Question 20

Number of producers

Answer 20

The quantity of goods and services supplied depends on the number of other businesses that are producing the same product.

If more businesses start to produce the same product there will be an increase in the supply of that product.

If some businesses shut down, there will be a decrease in the supply of that product.

Question 21

The law of supply

Answer 21

The law of supply states that the higher the price the of or service the higher the quantity supplied by producers

Question 22

Supply schedule

Answer 22

A supply schedule is a table that contains the values for the price of a good and the quantity that will be supplied at that price

Question 23

Supply curve

Answer 23

A supply curve is a graph that shows the quantity of a good or service that producers are willing to supply at different prices.

A supply curve is created by plotting the data from the supply schedule on the graph

Question 24

Market equilibrium

Answer 24

The market equilibrium price is the price at which the demand for and supply of a good are the same.

It is the point at which the demand curve intersects the supply curve.

At the equilibrium point the quantity demanded is equal to the quantity supplied.

If the price of the good or the service is set above the market equilibrium price, the market is said to be indisequilibrium.

When there is asurplusof a good in the market, producers lower the price in order to get rid of theexcess shock.

Due to the surplus in the market, suppliers will continue to lower the price until we reach at the equilibrium point where quantity supplied is equal to quantity demanded.

At a price which quantity demanded is larger than quantity supplied is known as ashortage.

When there is ashortageof a good or a service in the market, suppliers increase the price because they realize that there are many consumers who are willing and able to purchase the good or the services.

The price of the goods and services will continue to increase until we reach the market equilibrium price, where quantity supplied is equal to quantity demanded.

Question 25

Changes in demand

Answer 25

When the price of a good or service changes in, it leads to a change in quantity demanded.

If the price increases demand will decrease and if the price decreases demand will increase.

Anincreasein demand occurs when consumers are willing to purchase agreaterof the good or service at the given price.

Adecreasein demand occurs when consumers are willing and able to purchase asmallerquantity of the good or service at the given price.

Question 26

Changes in supply

Answer 26

When there is a change in the price of goods and services, there will be a change in the quantity of goods and services supplied.

If the price goods and services falls, the quantity of goods and services supplied will fall.

If the price of goods and services rise, the quantity of goods and services supplied will rise.

Anincreasein supply occurs when suppliers are willing and able to supply agreaterquantity for the goods and services at the given price

Adecreasein supply occurs when suppliers are willing and able to supply asmallerquantity of goods and service at every price.

Question 27

Impacts of changes in supply on the market price

Answer 27

Anincreasein the prices of goods and services leads to a new equilibrium point where demand meets supply being stablished in the market.

Adecreasein the prices of goods and services leads to a new equilibrium point where demand meets supply being established in the market.

A decrease in the supply of goods and services leads to an increase in the market price and decrease in the quantity sold.