Supply and demand test

Question 1

Demand

Answer 1

defined as the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

Question 2

effective demand

Answer 2

this is the combination of desire for a product or service with the ability and readiness to pay.

Question 3

Consumer sovereignty

Answer 3

this suggests that consumers control resources by deciding what to buy

Question 4

Law of inverse demand

Answer 4

states that there is an inverse relationship between price and quantity.

Question 5

Law of demand

Answer 5

States that the demand curve is downward sloping, 2 types of changes in demand:
-movement along the demand curve
-shifts in the demand curve( any other factor leading to an increase or decrease in demand)

Question 6

Movement along the demand curve

Answer 6

A change in price of the product will cause a movement along the demand curve. Other factors remaining constant (ceteris paribus) there is an inverse relationship between the price of a good and demand therefore: A fall in price of the good results in an extension of demand (quantity demanded will increase). Whilst an increase in price causes a contraction in demand (quantity demanded will decrease)

Question 7

Complementary goods

Answer 7

Products which are bought and used together. A fall in price of good x will lead to an extension in quantity demanded for x. And this might lead to higher demand for the complement Good Y. Complements are said to be in joint demand. The cross price elasticity of demand for 2 complements is negative. Examples include, fish and chips, pasta sauce and pasta, shoes and polish and flights and taxi services.

Question 8

Substitutes

Answer 8

Substitute goods are two alternative goods that could be used for the same purpose. They are goods that are in competitive demand. A rise in Price of Good x will lead to a contraction in demand for Good x. This might then cause some consumers to switch to a rival product Good y. This is because the relative price of Good y has fallen. The cross price elasticity for 2 substitutes is positive. Examples include: tea and coffee, smartphone brands, supermarket chains, cereal brands.

Question 9

Normal goods

Answer 9

Goods that experience an increase in demand due to an increase in consumer income, e.g. clothing, holidays, electronics.

Question 10

Inferior goods

Answer 10

A good whose demand decreases when peoples income rises when real incomes rise during economic growth, demand for inferior goods will fall curing an inward shift of demand curve. Examples include, own label discounters, economy class travel, public transport, cigarettes.

Question 11

Shift in demand curve

Answer 11

Shift in demand curve is caused by a change in any factor other than price. The curve can shift to the right(increase) or left(decrease) . These are known as the conditions/ determinants of demand.
Determinants of Demand:
-price of substitutes
-price of complements
-taste and preferences
-advertising
-income
-population- changes in size/ age distribution

Question 12

Supply

Answer 12

defined as the quantity of a product that a producer is willing and able to supply into the market at a given price in a given time period.

Question 13

Changes In supply

Answer 13

2 types of changes in supply:
- Movement along the supply curve
- Shifts in the supply curve

Question 14

Law of supply

Answer 14

Positive relationship between price and quantity supplied. As price rises, quantity supplied rises.

Question 15

Movement along the supply curve

Answer 15

Causes by a change in price of the good or service. An increase in the price of the good results in an extension of supply (quantity supplied will increase). A decrease in price causes a contraction of supply (quantity supplied will decrease)

Question 16

Shifts in Supply curve

Answer 16

Shifts in supply curve caused by a change in any non price determinant of supply. Curve can shift right or left- Demand curve must also be included. Determinants of Supply:
-technology
-legislation
-taxes placed by government on products/ services
-subsidies
-weather/natural disaster
-changes to number of firms in an industry
-cost of production

Question 17

The Price Mechanism

Answer 17

This is the mechanism through which price is determined in a market system. Basically, the price will adjust until supply equals demand, at which point we have the equilibrium price. Price mechanism refers to the system where the forces of demand and supply determine the prices of commodities and the changes there in. It is the buyers and sellers who actually determine the price of a commodity. Its responsible fro the allocation of resources in a free market economy. The decisions of consumers and producers are all responsible for how the price mechanism work through demand and supply.

Question 18

Equilibrium

Answer 18

Equilibrium basically means ‘a state of rest’. In a D & S diagrams the market is at rest when supply = demand - the point where the 2 points meet. This is the point where amount consumers demand at a given price is exactly the same as the amount businesses are prepared to supply at a given price

Question 19

Market disequilibrium

Answer 19

when the market does not clear/ when there is excess demand or excess supply.

Question 20

Excess demand

Answer 20

when demand for product is higher than the amount firms wish to supply. Stock will be sold very easily. The price could possibly be raised on a good like this given the popularity. This could be done until demand equaled supply. Can occur when a ceiling price (or max price) is placed on an item so it’s more affordable for everyone. Usually done as part of government intervention- ie in housing market that might impose a rent cap. When price is too low

Question 21

Excess supply

Answer 21

Excess supply is when price is above market rate, when price is too high. Excess supply can occur when a min price is placed on a product. It is usually done by the government to reduce consumption of a particular item. One recent example is the min price for alcohol is Scotland.

Question 22

Shift in demand

Answer 22

*How do shifts in demand affect equilibrium price?
The original equilibrium price is lower p1 and at this point q1 is demanded and supplied. Say a business increases its advertising this is likely to increase demand shown by the shift in the demand curve right to D2. If the price remains at PI there is excess demand.
* As before this is likely to cause the price to go upwards and this will keep going until we reach the new equilibrium price where the new demand curve crosses the supply curve (at higher Q2/P2).
* Note that there has been a shift in the demand curve, but only a movement along the supply curve (to reflect the increase in price). None of the determinants of supply have changed.

Question 23

shift in supply

Answer 23

Suppose that a new pasta-making machine is produced, enabling dried pasta makers to produce at a lower cost than before. This is likely to reduce a firms costs and incentivise them to supply more pasta. The supply curve will shift to the right.
* If the price remained at P(higher) there would be excess supply. However the market is likely to adjust to a new equilibrium price of PI(lower).
* Not there has been a movement along the demand curve as the price has changed an extension of demand.

Question 24

Main functions of price mechanism

Answer 24

A- allocate scarce resources
R- rationing excess
S- signals sent
I- incentive

The market will allocate scarce resources as effectively as possible at equilibrium. By rationing away excess demand/ supply. This is through signals that are sent to the producer to lower or increase price. This is because there is an incentive to increase profit.

Question 25

Price mechanism - Rationing

Answer 25

Due to scarcity not everyone is able to buy everything they want, when demand is greater than supply, prices will rise so that the good/service is rationed out only to those who can afford to pay for the items

Question 26

Price mechanism - Incentive

Answer 26

When the price of a product rises it creates an incentive for firms to shift production towards products that help generate higher profits. Likewise falling prices may create an incentive for firms to move away from the production of a product.

Question 27

Price mechanism- Signalling

Answer 27

When the price of a product rises it signals to producers that the demand for that product is probably high and firms should increase production. Prices are helping to determine where and how resources should be allocated.