Supply And Demand

Question 1

What is the production function?

Answer 1

Yt=f(Lt, Kt) At

Question 2

What is production?

Answer 2

Production = Units of labour combined with units of capital, scaled up by units of technology

Question 3

How is economic growth reflected in a graph?

Answer 3

The production possibility frontier moves outwards, reflecting an increase in productive capacity

Question 4

How can we enable money prices to move to the correct level to enable trade?

Answer 4

The exchange rate and wages can be altered

Question 5

What determines market dimension?

Answer 5

Location, price, quantity, time

Question 6

What determines demand?

Answer 6

The products price, the price of alternative products, household incomes, consumer preferences

Question 7

How is the market demand function expressed?

Answer 7

Dx= f(Px, Pn, I, Preferences)

Question 8

What does a fall in prices of a product cause?

Answer 8

Demand goes up (substitution and income effect)

Question 9

If incomes rise, how does that affect demand?

Answer 9

Demand rises if it is a normal good, and decreases if it is an inferior good (income effect)

Question 10

If the price of an alternative product goes up, how does this affect demand for the original product?

Answer 10

Increases (substitution effect)

Question 11

If the prices of a good increase, what happens to supply?

Answer 11

Increases (firms aim to sell goods at higher prices)

Question 12

If the price of a substitute good falls, how does this affect demand for the original product?

Answer 12

Decreases (substitution effect)

Question 13

What does market supply depend on?

Answer 13

The price at which products are sold, production costs and technology, the number of firms operating in the market

Question 14

How is the supply function expressed?

Answer 14

Sx = f(Px, input costs, technology, no of firms)

Question 15

If new firms enter the market, what happens to supply?

Answer 15

The supply curve shifts to the right; supply quantities increase, prices stay the same

Question 16

What happens to supply if input costs rise?

Answer 16

The supply curve shifts to the left; quantities decrease and prices stay the same

Question 17

What does the market equilibrium show?

Answer 17

The point at which demand and supply are in balance - the plans of consumers and producers are in balance.

Question 18

What does it mean if the market is above the equilibrium?

Answer 18

There will be an excess of supply, and market prices fall

Question 19

What does it mean if the market is below the equilibrium?

Answer 19

There is a shortage - people are willing to buy more than the firm is willing to supply, and market prices rise

Question 20

What happens if there is an excess of demand in the market?

Answer 20

Prices rise to stimulate supply, causing demand to contract - creates new equilibrium.

Question 21

What happens if there is an excess of supply in the market?

Answer 21

Prices begin to fall, reducing supply and stimulating demand and creating a new equilibrium

Question 22

What is elasticity?

Answer 22

How much demand changes if there is a price change

Question 23

How is elasticity calculated?

Answer 23

% change in quantity demanded / % change in price

dQ/Q) / (dP/P) OR (dQ/dP) x (P/Q

Question 24

What are our productive resources?

Answer 24

Labour (L), Capital (K), Technology (A)

Question 25

Does elasticity go up or down if prices go up?

Answer 25

Goes up because quantities are going down

Question 26

What does it mean if a demand curve is steeper over a give. p/Q range?

Answer 26

It is more inelastic, but remember that this is relative

Question 27

What gradient does a perfectly inelastic demand curve have?

Answer 27

Vertical (no impact on demand)

Question 28

What is the gradient of a perfectly elastic demand curve?

Answer 28

Horizontal (no impact on quantity)

Question 29

Will demand be elastic or inelastic if there is a high availability of substitute goods?

Answer 29

Elastic (demand will be highly affected by price changes if there are plenty of competitor items)

Question 30

Will demand be price elastic or inelastic for necessities?

Answer 30

Inelastic - many people rely on these items unlike luxury goods, which are likely to be elastic

Question 31

How does market definition affect price elasticity?

Answer 31

The more widely it is defined, the more elastic prices will be. ( eg. Demand for food is more inelastic than the demand for a particular type of food)

Question 32

Will demand be elastic or inelastic in the long run?

Answer 32

Elastic - buyers have more time to find substitutes and alter behaviour than in the short term

Question 33

How do you calculate margins from demand curves?

Answer 33

If prices fall, the difference between the two numbers on the Y axis forms the revenue lost. The increase between the two numbers on the X axis forms the revenues gained

Question 34

What is cross priced elasticity?

Answer 34

The impact on demand arising from changes in the prices of other goods

Question 35

How do you work out the cross price elasticity of two goods?

Answer 35

% Change in the quantity of X / % change in the price of Y

Question 36

Is cross price elasticity positive or negative for substitute goods?

Answer 36

Positive - the rise in the price of Y leads consumers to switch to X

Question 37

Is the cross price elasticity for complementary goods positive or negative?

Answer 37

Negative - the rise in the price of Y leads to a fall in the demand for Y, and hence a fall in the demand for complementary good X (fortunes of one affect the other)

Question 38

What is the price elasticity of supply?

Answer 38

The responsiveness of supply to changes in price

Question 39

How do you work out supply elasticity?

Answer 39

% increase in quantity supplied / % increase in price

Question 40

What does inelastic supply mean?

Answer 40

Elasticity is less than 1 and any given % change in price rise leads to a smaller % change in quantity supplied

Question 41

What does elastic supply mean?

Answer 41

Elasticity is greater than 1 and any given % change in price leads to a large % change in quantity supplied

Question 42

What gradient does a perfectly inelastic supply curve have?

Answer 42

Vertical - any % change in price leaves the quantity supplied unchanged

Question 43

What gradient does a perfectly elastic supply curve have?

Answer 43

Horizontal - elasticity is infinite and firms can supply as much as people want to buy at a given price