Semester 1

Question 1

Demand Definition

Answer 1

The amount of a good/service that a consumer is willing and able to purchase at a given price in a given period of time.

Question 2

As P increases, Q:

Answer 2

Decreases

Question 3

Market Demand Definition

Answer 3

Combination of all the individual demand for a good/service.

Question 4

DEMAND - Contraction VS Extension

Answer 4

C: P increase = Q decrease
E: P decrease = Q increase

Question 5

Factors that change the demand from a good or price service

Answer 5

• changes in income
• changes in tastes/preferences
• substitutes
• changes in number of consumers
• future price expectations

Question 6

Movement along the demand VS a shift in demand:

Answer 6

When price changes, there is a movement along the demand curve resulting in a change to the quantity demanded.
When a non-price determinant of demand changes, there isa shift of the entire demand curve resulting in a change to demand.

Question 7

Supply definition

Answer 7

The amount of a good/service that a producer is willing to supply at a given price in a given time period.

Question 8

When price rises, QS:
When price falls, QS:

Answer 8

Rises.
Falls.

Question 9

Market supply definition

Answer 9

The combination of all the individual supply for a good/service.

Question 10

How do you calculate the individual supply?

Answer 10

By adding up the individual supply at each price level.

Question 11

SUPPLY - Extension VS Contraction

Answer 11

E: P increase = Qs increase
C: P decrease = Qs decrease

Question 12

Factors affecting supply

Answer 12

• changes to costs of production
• changes to indirect taxes and subsidies
• changes to technology
• changes to the number of firms
• weather events
• future price expectations
• goods in joint and competitive industry

Question 13

Effect of a subsidy on supply and demand:

Answer 13

• supply curve will shift to the right
• as a result there will be a movement along the demand curve

Question 14

Market definition

Answer 14

Any place that brings buyers and sellers together.

Question 15

When does equilibrium of a market occur?

Answer 15

When demand = supply

Question 16

What is Qd > Qs

Answer 16

Excess Demand

Question 17

What is the market response to disequilibrium in terms of getting rid of excess demand?

Answer 17

Sellers realize they can increase prices and generate more revenues and profits.

Question 18

What’s Qs > Qd

Answer 18

Excess supply

Question 19

What is the market response to disequilibrium in terms of getting rid of excess supply?

Answer 19

Sellers will gradually lower prices in order to generate more revenue.

Question 20

If we want to ration a product, what do we do?

Answer 20

We increase the price so less people will buy it.

Question 21

Incentive (not an IB definition)

Answer 21

Financial motives for people to take certain actions.

Question 22

Functions of the price mechanism (not IB definition)

Answer 22

A system of signals that guide producers and consumers in their decisions, helping to balance supply and demand and achieve market equilibrium.

Question 23

Examples of functions of the price mechanism:

Answer 23

• allocating resources
• signaling changes in supply and demand
• providing incentives to producers and consumers

Question 24

Consumer surplus definition

Answer 24

The difference between the amount a consumer is willing to pay for a product and the price they have actually paid.

Question 25

Producer surplus definition

Answer 25

The difference between the amount that the producer is willing to sell a product for and the price they actually do.

Question 26

Where on a diagram do you find c+p surplus?

Answer 26

Consumer surplus above, producer surplus below.

Question 27

Allocative efficiency

Answer 27

• where MB = MC (marginal benefit = marginal cost)
• resources are allocated so that consumers and producers get the maximum possible benefit
• there’s no excess demand or supply

Question 28

Productive efficiency

Answer 28

• occurs at the level of output where average costs are minimized
• there’s no wastage of scarce resources
• high level of factor productivity