Section 3: Demand and Supply

Question 1

What is a market?

Answer 1

A market is a place where buyers and sellers meet for the purpose of buying and selling or exchanging goods and services

Question 2

What are the two market forces at work

Answer 2

Demand and supply

Question 3

What market forces are consumers influenced by

Answer 3

Consumers are influenced by the market forces of demand in order to maximize their satisfaction given their income

Question 4

What market forces are producers influenced by

Answer 4

Producers are influenced by the market forces of supply in order to achieve their profit maximization

Question 5

What happens when these market forces come together

Answer 5

These market forces when come together determines the equilibrium of price and quantity of the good or service

Question 6

What is demand

Answer 6

demand is the desire and willingness of a consumer to purchase a good or service in a given time period

Question 7

What is Effective Demand

Answer 7

effective demand is the desire and willingness of a consumer to purchase a good or service backed by the ability to purchase it

Question 8

Quantity Demanded

Answer 8

The desire and willingness of a consumer to purchase a good or service at various price levels in a given time period

Question 9

Changes in Quantity Demanded is influenced by

Answer 9

changes in the price of the good or service only

Question 10

What is an Individual Demand Curve (sorry it so long but I like to keep my definitions in one)

Answer 10

an individual demand curve reflects the quantity of a particular good or service demanded at each given price level. the demand curve is downward sloping to reflect the inverse relationship between the price of the good and quantity demanded. this means that when the price of the good increases, quantity demanded decreases. Inversely when the price decreases, quantity demanded increases

Question 11

Imagine you made a diagram of an individual demand curve, explain what occurs on it

Answer 11

When the price increased from $10 (for example) to $13, quantity demanded decreased from 25 units to 18 units. When the price decreased from $10 to $5, the quantity demanded by the consumer increased from 25 to 30 units

Question 12

Draw up YOUR individual demand curve for ice cream

Answer 12

and explain it ( like it was done in question 11 but include the product’s name- ice cream- and your name)

Question 13

What is the Market Demand Curve

Answer 13

the market demand curve is a horizontal summation of all individual demand curves

Question 14

Abia and Maritza both possess the demand for chocolate. At $20 Abia’s quantity of chocolates demanded is 3 units, and Maritza’s is 8. At $5, Abia’s is 7 and Maritza’s is 15. Describe the Market Demand Curve and how you got it. (Draw it for some extra work if you want)

Answer 14

(In the diagrams above), the market demand curve for chocolate is found by summing Abia’s and Maritza’s Individual Demand Curves for chocolate. Assuming that there are 2 individuals in the market for chocolate, the market demand for chocolate at the price of $20 is 11 (3+8), while the market demand at $5 is 22 (7+15).

Question 15

Make up your own example of a market demand curve and draw and explain it

Answer 15

NOW

Question 16

What are Movements Along the Demand Curve caused by

Answer 16

Movements along the demand curve are caused by changes in the price of the good only, and is referred to as a change in quantity demanded

Question 17

Explain how an increase and a decrease in the price of a good will affect a demand curve (movements along the demand curve)

Answer 17

An increase in the price of a good will cause a decrease in quantity demanded which is shown by an upward movement along the demand curve, termed ‘a contraction in demand’. A decrease in the price of the good will cause an increase in quantity demanded, shown by a downward movement along the demand curve termed ‘an extension in demand’.

Question 18

draw a diagram showing movements along the demand curve and explain it using the prices $10, $7 and $3, and the units 5, 9 and 13.

Answer 18

The diagram (above) displays movements along the individual’s demand curve for good X. When the price increased from $7 to $10, there was an upward movement along the demand curve from point A to B due to the decrease in quantity demanded for good X from 9 units to 5 units. This is a contraction in demand for good x. Conversely, a decrease in the price of good x from $7 to $3 resulted in a downward movement along the demand curve from point A to C due to an increase in quantity demanded for good x from 9 to 13 units. This is an extension in demand for good x.

Question 19

Shifts of the demand curve are caused due to

Answer 19

shifts of the demand curve are caused due to changes in non-price factors and is known as changes in demand.

Question 20

What does each shift of the demand curve represent

Answer 20

An outward/rightward shift of the demand curve represents an increase in demand at all price levels. An inward/leftward shift of the demand curve represents a decrease in demand at all price levels

Question 21

draw 2 diagrams, diagram A being an outward shift and B, inward. Discuss. (ill be using example numbers)

Answer 21

In diagram A, demand increases from 10 to 17 units with the price of the good unchanged at $7. In diagram B, the demand for the good decreases from 10 to 7 units with the price of the good unchanged at $7.

Question 22

Explain the difference in what causes shifts vs movements of the demand curve

Answer 22

When it’s a non-price factor it causes a shift of the demand curve known as a change in demand. when it’s the price of the good changing it causes movements known as changes in the demand curve.

Question 23

Non-Price Factors that Cause Shifts of the Demand Curve (1-8)

Answer 23

1. Income(normal and inferior goods)
2. Price of OTHER goods (substitute and complementary goods)
3. Taste and preference
4. advertising
5. popularity/ peer influence
6. convenience/ accessibility
7. EXPECTATION of price change (future price)
8. government legislation

Question 24

Income is divided into

Answer 24

normal and inferior goods

Question 25

Normal goods are

Answer 25

goods that are said to have a positive relationship between consumers' income and a demand for goods or services

Question 26

Explain the positive relationship in normal goods and the shifts of the demand curve

Answer 26

This means when a consumer's income increases, demand for the good or service increases. this is shown by a rightward/ outward shift of the demand curve Inversely, when a consumer's income decreases, demand for the good or service decreases. shown by a leftward/inward shift of the demand curve

Question 27

Normal goods in terms of elasticity

Answer 27

normal goods have a positive income elasticity of demand

Question 28

Explain the negative relationship in inferior goods and the shifts of the demand curve

Answer 28

These are goods which have a negative/inverse relationship between consumers' income and demand for the good or service When a consumer's income increases, demand for the good or service decreases. shown by an inward/leftward shift of the demand curve A decrease in consumer's income will lead to an increase in the demand for the good or service. shown by an outward/rightward shift of the demand curve

Question 29

Inferior goods in terms of elasticity

Answer 29

Inferior goods have a negative income elasticity of demand

Question 30

Price of Other Goods is divided into

Answer 30

substitute and complementary goods

Question 31

Substitute goods

Answer 31

These are goods that can be used in place of each other. They have a positive cross elasticity of demand due to the positive relationship between price of the other good and demand for the good

Question 32

What occurs with changes of price of substitute goods

Answer 32

When the price of the other good increases, demand for the good increases. illustrated by an outward shift for the good Conversely, when the price of the other good decreases, demand for the good decreases. inward shift of the demand curve for the good

Question 33

Example of substitute good

Answer 33

the good- Pepsi the other good- Coca Cola explain using previous info

Question 34

Complementary goods

Answer 34

complementary goods are goods that are used hand in hand. These have a negative cross elasticity of demand due to the inverse relationship between price of the other good and demand for the good

Question 35

Complementary goods in terms of price change

Answer 35

When the price of the other good increases, demand for the good decreases. inward shift of the demand curve When the price of the other good decreases, demand of the good increases. outward shift of the demand curve

Question 36

Example of complementary goods

Answer 36

the good-vehicles the other good-gas

Question 37

Expectation of Price Change/ Prices

Answer 37

If a consumer expects the future price pf a good or service to rise, then demand for the current good or service will increase as it will be cheaper to purchase now than in the future leads to an outward shift in the current demand curve Inward shift- consumer expects decrease in future price, then a decrease in current demand will occur as it will be cheaper to purchase in the future

Question 38

try expectation of price with shoes as a good

Answer 38

use previous answer

Question 39

Advertising/Promotion

Answer 39

An increase in advertising/promotions for a good or service encourages the individual to purchase the good or service. It has the effect of creating a desire for the g/s therefore demand increases. reflected by an outward shift of the demand curve Conversely, when advertising/promotions decrease for a particular good, demand decreases. reflected by inward shift

Question 40

Taste and Preference

Answer 40

An increase in consumers' taste and preference towards a g/s leads to an increase in the demand for the g/s. Graphically shown by an outward shift of the dc A decrease in consumers' taste and preference for a g/s leads to a decrease in demand for the g/s. Graphically shown by an inward shift of the demand curve

Question 41

Summary of Factors- A rightward shift is caused by

Answer 41

-rise in the price of a substitute -fall in the price of a complement -increase in income (normal goods) -decrease in income (inferior goods) -an increase in population -new fashion, greater taste -increased advertising -government legislations (subsidies- gov pays part of price)

Question 42

Summary of Factors- A leftward shift is caused by

Answer 42

-fall in price of a substitute -rise in price of a complement -decrease in income (normal g) -increase in income (inferior g) -a decrease in population -old fashion, reduced taste -decreased advertising -government legislation (taxes imposed for a good- eg alcohol)