Supply, Markets, Elasticity and Taxes

Question 1

What is a market?

Answer 1

A place where items are sold

• buyers and sellers
• goods, services, resources, inputs and more
• varying in intensity of competition
• physical or virtual
• use a price mechanism to balance competing demands of buyers and sellers

Question 2

What are the conditions when you demand?

Answer 2

Want it
Can afford it
Plan to buy it

Question 3

What is quantity demanded?

Answer 3

The amount of a good that all consumers in total are willing and able to buy at a given price over given time period

Question 4

What is the assumption behind the Law of Demand?

Answer 4

other things remaining the same, the higher the price of the good, the lower the quantity demanded and vice versa

Question 5

What is the demand curve a relationship between?

Answer 5

The pice of a good and quantity demanded of the good

Question 6

What are the conditions for supply?

Answer 6

Has the resources and technology to produce it
Thinks it can profit from producing it
Plans to produce and sell it

Question 7

What is quantity supplied?

Answer 7

The amount of good that producers make available to sell at a given price over a given time period

Question 8

What is the Law of Supply?

Answer 8

Other things remaining the same the higher the price, the greater the quantity supplied and vice versa
Higher price = more profit potential

Question 9

What does ceteris paribus mean?

Answer 9

Other things remaining the same

Question 10

What factors influence selling plans?

Answer 10

Price
Price of factors of production
Prices of related goods produced
Expected future prices
The number of suppliers
Technology

Question 11

What is the market equilibrium?

Answer 11

The situation where opposite market forces balance each other
Price where QD=QS

Question 12

What is price elasticity of demand?

Answer 12

The proportionate change in quantity demanded divided by the proportionate change in price - the responsiveness of QD to a change in price when “ceteris paribus”

Question 13

How is Price elasticity of demand calculated?

Answer 13

(%change in QD/QD) / (%change in P/P)

Question 14

What point is used when calculating PED?

Answer 14

the mid point of the change - gives average elasticity at the point mid-way between original and new point

Question 15

How does PED represent:

• Elastic Demand
• Inelastic Demand
• Unitary Elasticity

Answer 15

Elastic - PED > 1 (QD responds substantially)
Inelastic - PED < 1 (only responds slightly)
Unitary - PED = 1 (responds proportionally the same)

Question 16

How are perfect elastic and perfect inelastic demand shown?

Answer 16

Perfect elastic is infinity - horizontal

Perfect inelastic is 0 - vertical

Question 17

How does a cheap product effect sensitivity to price? And therefore where on the demand curve is price most inelastic?

Answer 17

Demand is less and less sensitive to changes in price the cheaper the product
Demand is more inelastic lower down the curve

Question 18

When will maximum total revenue be generated?

Answer 18

When price has elasticity of 1 - is unitary elastic

Question 19

How is TR related to elasticity?

Answer 19

Elastic: increase price = decrease quantity (more) = decrease TR
Inelastic: increase price = decrease quantity (less) = increase TR
Unitary: TR unaffected by increase in price

Question 20

How is a more inelastic demand curve shown?

Answer 20

Steeper, less change in quantity demanded, much less like infinity (perfect elastic)

Question 21

What determines PED?

Answer 21

Number and closeness of substitutes
- more and close = more price elastic, increase sub. effect
Nature
- if it is addictive
Proportion of income spent on a good
- higher proportional of income spent larger income effect (increase price elastic)
The time period
- longer periods demand increase price elastic as there is more time to adjust to potential alternatives e.g. insulation on house should price of heating increase

Question 22

What are other types of elasticity?

Answer 22

CrossED - Cross Elasticity, responsiveness of demand for one product to a change in price of another complements, substitutes
YED - Income Elasticity, responsiveness of demand to consumer income, normal goods, inferior goods
PES - Price Elasticity of Supply, responsiveness of supply to a change in price

Question 23

Why are taxes imposed by the government?

Answer 23

As a tool of government policy to change consumer behaviour and thus have a big influence on firm’s profitability

Question 24

How do taxes effect quantity produced?

Answer 24

Higher tax causes quantity produced to decrease from Q* - Qt

Question 25

How is the amount of tax shown on a lump sum graph?

Answer 25

The different between Pc and Pp

Question 26

Who pays the tax in lump sum tax?

Answer 26

Producers pay the tax not the consumer, they make the payment on the consumer’s behalf as they deduct the tax from their increase profit

Question 27

Explain who faces the burden of tax

Answer 27

Consumers burden is the difference between P* and Pc

Producer burden is the difference between P* and Pp

Question 28

What does the burden of tax depend on?

Answer 28

Elasticity of demand and supply (could fall entirely on one in sum cases)
Steeper demand (inelastic) causes greater consumer burden, elastic = producer

Question 29

What is ad valorem tax?

Answer 29

Tax as a percentage of the value of the product

Supply pivots inwards rather than shifts (lump-sum)