Demand & Supply

Question 1

Central Economic Problem

Answer 1

Scarcity due to unlimited wants but limited resources forces us to make choices.

Question 2

Opportunity Cost

Answer 2

Value of next best alternative option forgone

Question 3

Rational decision making

Answer 3

Aim to maximise (marginal benefit - marginal cost)

Consumers maximise marginal utility
Producers maximise profits
Governments maximise social welfare

Question 4

Factors of production

Answer 4

1. Capital
2. Entrepreneurship
3. Land
4. Labour

Question 5

Production Possibility Curve

Answer 5

Shows all the possible combinations of output the country can produce if all resources are efficiently employed

Question 6

Factors that affect demand

Answer 6

1. Income
2. Taste & preferences
3. Price of related good
4. Demographic of consumers
5. Government policies

Question 7

Factors that affect supply

Answer 7

1. Cost of production
2. Supply shocks
3. Price of related good
4. Number of firms
5. Government policies

Question 8

Market adjustment process

Answer 8

1. Explain factor affecting DD/SS
2. Link to willingness and ability of consumer or producer
3. Shift curve on diagram
4. At original equilibrium, change in quantity demanded
5. Leads to surplus or shortage
6. Up/downward pressure on price
7. Thus consumers willing and able to consume more or less good
8. Quantity demanded falls or increases at new market equilibrium, eliminating the shortage/surplus

Question 9

Price elasticity of supply

Answer 9

1. Rate of production
2. Amount of spare capacity firm has
3. Perishability of product or stockpile of product
4. Factor mobility

Question 10

Price elasticity of income

Answer 10

Type of product (inferior, normal or luxury good)

Question 11

Price elasticity of demand

Answer 11

1. Number of substitute products
2. Degree of necessity of product
3. Percentage of income product price is worth
4. Time period

Question 12

Elasticity analysis

Answer 12

1. Define elasticity used
2. State if good is elastic or inelastic
3. Hence a change in factor leads to a less/more than change in demand/supply
4. Market adjustment process (if needed)
5. Concluded with impact on firm, consumer

Question 13

Cross-price elasticity

Answer 13

1. Are the two goods complements or substitutes?
2. How close of a complement/substitute are the goods