Microeconomics: Price System, Supply & Demand

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Questions and Answers

According to the basic principles of demand, what typically happens to the quantity demanded of a good when its price increases?

  • The quantity demanded decreases. (correct)
  • The quantity demanded remains unchanged.
  • The quantity demanded increases.
  • There is a shift in the demand curve.

What does 'effective demand' refer to in economics?

  • The willingness and ability of consumers to purchase goods at different prices. (correct)
  • The demand that is influenced by advertising.
  • The desire of consumers to purchase goods, regardless of their ability to pay.
  • The demand for essential goods only.

What is the effect of an increase in consumer income on the demand for normal goods?

  • There is a movement along the demand curve.
  • Demand increases. (correct)
  • Demand decreases.
  • Demand remains unchanged.

If the price of coffee increases, how is the demand for tea likely to be affected, assuming tea and coffee are substitutes?

<p>The demand for tea increases. (C)</p> Signup and view all the answers

How does a significant change in consumer tastes or fashion trends typically affect demand for a product?

<p>If the product becomes more fashionable, demand increases; if it becomes outdated, demand falls. (D)</p> Signup and view all the answers

What is the primary impact of a larger population on the demand for goods and services within an economy?

<p>Increased demand due to more consumers. (D)</p> Signup and view all the answers

If consumers expect that the price of a particular product will significantly increase in the near future, how does this expectation affect current demand?

<p>Current demand increases as consumers try to buy the product before the price hike. (C)</p> Signup and view all the answers

How does advertising typically influence the demand for a product?

<p>By increasing awareness and potentially increasing demand. (B)</p> Signup and view all the answers

What is the difference between a 'movement along the demand curve' and a 'shift in the demand curve'?

<p>A movement along the curve is caused by a change in the price of the good; a shift is caused by a change in other factors. (B)</p> Signup and view all the answers

What do economists mean by 'market demand curve'?

<p>The sum of all individual demands for a good or service by all consumers in a market. (A)</p> Signup and view all the answers

In the context of supply, what does the term 'supply' refer to?

<p>The quantity of a good that producers plan to sell at various prices. (B)</p> Signup and view all the answers

According to the law of supply, what happens to the quantity supplied of a good when its price increases?

<p>The quantity supplied increases. (D)</p> Signup and view all the answers

How does a decrease in the cost of production typically affect the supply of a product?

<p>Supply increases as production becomes more profitable. (B)</p> Signup and view all the answers

How do technological advancements generally affect the supply curve?

<p>They shift the supply curve to the right, increasing supply. (B)</p> Signup and view all the answers

If the government imposes taxes on the production of a certain good, how does this policy typically affect the supply of that good?

<p>Supply decreases because taxes increase the cost of production. (D)</p> Signup and view all the answers

What is the likely effect on the supply of gasoline if the government provides a subsidy to gasoline producers?

<p>The supply of gasoline increases. (B)</p> Signup and view all the answers

If producers expect the price of their product to increase substantially in the future, how might this expectation affect their current supply?

<p>Current supply decreases as producers hold back supply to sell at a higher price later. (B)</p> Signup and view all the answers

How does an increase in the number of sellers in a market typically affect the market supply?

<p>Market supply increases as more firms are supplying the product. (C)</p> Signup and view all the answers

How can seasonal factors impact the supply of agricultural products like fruits and vegetables?

<p>Good weather during the growing season may increase supply, while bad weather may reduce it. (D)</p> Signup and view all the answers

What is the key difference between a 'movement along the supply curve' and a 'shift in the supply curve'?

<p>A movement results from a change in the price of the good itself, while a shift results from changes in other factors affecting supply. (C)</p> Signup and view all the answers

In economics, what does 'market supply curve' represent?

<p>The sum of all individual firms' supply curves in a particular market. (C)</p> Signup and view all the answers

Which of the following scenarios illustrates a situation where the demand curve for a product would shift to the right?

<p>A successful advertising campaign significantly increases consumer preference for the product. (A)</p> Signup and view all the answers

Which scenario would cause a movement along the supply curve for smart phones?

<p>The market price of smart phones increases. (D)</p> Signup and view all the answers

If the price of ink decreases, what effect will it have on the supply of pens, assuming ink is a complementary good in the production of pens?

<p>The supply of pens will increase. (C)</p> Signup and view all the answers

What is a Giffen good?

<p>A good for which demand increases as its price increases, violating the law of demand. (D)</p> Signup and view all the answers

How does the supply curve for a Giffen good differ from a typical supply curve?

<p>The supply curve of a Giffen good is upward-sloping, like typical goods. (C)</p> Signup and view all the answers

Why do low-income consumers often buy more of a Giffen good when its price increases?

<p>Because the income effect outweighs the substitution effect, and they cannot afford better alternatives despite the higher price. (D)</p> Signup and view all the answers

Which of the following characteristics is NOT typical of a Giffen good?

<p>It has many close substitutes. (B)</p> Signup and view all the answers

Assuming milk to be a normal good, what effect will there be on the demand for milk if a decline in income to purchase milk occurs?

<p>The demand for milk will decrease. (D)</p> Signup and view all the answers

Flashcards

Demand Definition

Desire to purchase goods/services with the ability to pay a specific price.

Effective demand

Willingness and ability to buy goods at varying prices, showing actual purchases.

Individual demand curve

Curve showing the price people are willing to pay for specific quantities of a good.

The Law of Demand

The inverse relationship between price and quantity demanded.

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Price Effect on Demand

Price of the product impacts movement ON the demand curve.

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Consumers' income

Increased income typically increases demand for normal goods.

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Substitutes Definition

Goods that replace each other

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Complementary Goods

Goods consumed together.

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Taste and fashions

Consumer preferences that shift with trends, impacting product demand.

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Impact of Population

Larger populations generally lead to increased demand for goods and services.

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Expectation on future price

Belief that future price hikes will increase current buying.

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Movement Along the Demand Curve

Shift along demand curve.

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Shift of the demand curve

Entire demand curve shifts.

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Market Demand Curve

Total quantity demanded across all consumers in a market.

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Giffen Goods

Low-income, non-luxury products that defy typical demand laws.

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Supply

Quantity of a good producers plan to sell in the market.

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The Law of Supply

The direct relationship between price and quantity supplied.

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The cost of production impacts the supply

Cost to produce goods

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Technology

Technologies enable producers to lower COP and increase supply.

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Related goods and services

goods - supply of a product will decrease if there is an increase in the price of a substitute product, eg. Tablest and Laptops.

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Government policy

taxes will decrease the supply of goods and services; a subsidy will increases it.

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Expected future price

The higher the expected future price of a product, the smaller the current supply of the product and vice versa.

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Number of sellers

Larger the number of firms supplying a product, the larger the quantity supplied of the product and vice versa.

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Seasonal factor

Good weather increase supply, bad weather reduce supply.

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Movement Along Supply Curve

Change in quantity supplied due to a price change.

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Shift of the Supply Curve

Entire supply curve shifts due to factors besides price.

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Market Supply Curve

Total quantity supplied across all producers in a market.

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Study Notes

  • Chapter 2 focuses on the price system and the microeconomy
  • The lecture covers the concept of supply and demand within this system

Learning Objectives

  • Define effective demand
  • Understand individual and market demand and supply
  • Identify determinants of demand and supply
  • Recognize causes for shifts in demand and supply curves
  • Distinguish between shifts of, and movement along, demand or supply curves

Demand

  • Demand reflects a consumer's desire for goods/services and their willingness to pay a specific price
  • Effective demand is the ability and willingness of consumers to purchase goods at various prices, reflecting actual buying behavior
  • The individual demand curve shows the price people are willing to pay for a quantity of a good
  • Movement along the demand curve and shifts are factors

Law of Demand

  • There's typically a negative relationship between price and quantity
  • The demand curve usually has a negative slope

Determinants of Demand

Price of the Product

  • It leads to a movement along the demand curve
  • The quantity demanded changes with these conditions:
    • Higher price: leads to lower demand
    • Lower price: leads to higher demand

Consumer's Income

  • Higher income varies on the goods
    • Normal goods: demand increases
      • Shirts and books are examples
    • Inferior goods: demand decreases
      • Instant noodles are an example

Price of Other Goods and Services

  • Substitutes are goods that can replace each other
    • Increased coffee price leads to higher demand for tea
  • Complementary goods are those that are consumed together
    • Increased pen price may decrease ink demand

Taste and Fashions

  • Demand is influenced by consumer preferences and trends
    • Demand increases or decreases with their trends

Population

  • There is more demand with more people

Expectations on Future Price

  • Higher expected future prices may increase the current demand
  • Demand typically increases with goods and services that are advertised

Shifts vs. Movement Along the Demand Curve

  • Changes in any factor other than price causes the entire demand curve to shift
  • A change in the quantity demanded due to a change in the price of the good causes movement along the demand curve

Market Demand Curve

  • The sum of all quantities demanded by all households in a market for a specific good or service

Giffen Goods

  • Giffen goods are named after Sir Robert Giffen, a Scottish journalist and statistician
  • A Giffen good is a non-luxury item which sees demand increase with price
  • Typically, these are low-quality goods that are a significant part of low-income consumer spending
  • Giffen goods have an upward-sloping demand curve
  • Demand is influenced by a lack of substitutes and income limitations

Supply

  • It is the quantity of goods that producers are willing to sell in the market
  • Movement along the supply curve and shifts are factors

Supply Curve

  • Generally, There is a positive relationship between price and quantity supplied; the higher the price, the greater the quantity supplied

The Determinants of Supply

Price of Goods and Services

  • The cost of production affects supply
  • Supply changes in relation to the factors of production (FOP)
    • Increased cost of production lowers the quantity supplied

Technology

  • Introducing technologies may enable producers to use fewer factors of production (FOP)
    • This lowers cost of production and increases supply
  • For substitute goods such as tablets and laptops, supply decreases if there's a price increase for a substitute product
  • For complementary goods (e.g., pens and ink) an increase in the price of a product will increase the supply of its complement

Government Policy

  • Taxes decrease the overall supply of goods/services
  • Subsidies increase the overall supply of goods/services

Expected Future Price

  • If a higher future price is expected, the current supply of the product will decrease.

Number of Sellers

  • The larger the number of firms that are supplying a product, the larger the quantity that is supplied overall

Seasonal Factors

  • If there is good weather, it may increase the overall supply; if there is bad weather, it may reduce overall supply

Shifts vs. Movement Along the Supply Curve

  • The quantity supplied changes when there is change in the good's price, causing a movement along the supply curve
  • One of the shift factors changes causing a change to the supply, causing the supply curve to shift entirely

Market Supply Curve

  • The market supply curve is calucated by calculating summing of the indvidual supply curves of production in a market

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