Mid-Term Economics Questions – Pearson (Michael Parkin) Based
1. Define the Law of Demand with its Curve
i. A rise in the price, other things remaining the same, brings a decrease
in the quantity demanded and a movement up along the demand
curve.
ii. A fall in the price, other things remaining the same, brings an increase
in the quantity demanded and a movement down along the demand
curve.
iii. a change in the price change the quantity demanded for Two reasons:
Substitution Effect
When the relative price (opportunity cost) of a good or service rises, people
seek substitutes for it, so the quantity demanded of the good or service
decreases.
Income Effect
When the price of a good or service rises relative to income, people cannot
afford all the things they previously bought, so the quantity demanded of the
good or service decreases.
2. Define the Law of Supply with its Curve
The law of supply states that, other things remaining the same, the higher the
price of a good, the greater is the quantity supplied; and the lower the price,
the smaller is the quantity supplied. This direct relationship leads to an
upward-sloping supply curve.
When the price of the good changes and other influences on sellers’ plans
remain the same, the quantity supplied changes and there is a movement
along the supply curve.
Parkin emphasizes that as the marginal cost of production rises, producers
are willing to supply more only at higher prices.
3. Compare the Supply and Demand Determinants.
When some influence on buying plans other than the price of the good
changes, there is change in demand for that good:
When demand increases, the demand curve shifts rightward.
When demand decreases, the demand curve shifts leftward
Demand Determinants:
1. Income: When income increases, consumers buy more of normal
goods and less of inferior goods and the demand curve shifts
rightward.
2. Tastes and Preferences: Changes shift demand based on trends, fads,
and advertising.
3. Prices of Related Goods: Substitutes increase demand when the price
of the other good rises; complements decrease demand when their
price rises.
4. Expected Future Prices: If prices are expected to rise, current demand
increases.
5. Population: More buyers increase market demand.
6. Expected Future Income and Credit
7. When income is expected to increase in the future or when credit is
easy to obtain, the demand might increase now.
When some influence on selling plans other than the price of the good
changes, there is a change in supply of that good.
When supply increases, the supply curve shifts rightward.
When supply decreases, the supply curve shifts leftward.
Supply Determinants:
1. Prices of Factors of Production: Higher costs reduce supply.
2. Technology: Improvements increase supply by reducing cost.
3. Prices of Related Goods Produced: If prices of substitutes in
production rise, supply of the original good may fall.
4. Expected Future Prices: If prices are expected to rise, current supply
may decrease.
5. Number of Sellers: More sellers increase supply.
6. Natural Conditions: Weather, disasters, and seasonal changes affect
supply.
4. Explain the Equilibrium Situation in the Market
Market equilibrium occurs when the quantity demanded equals the quantity
supplied at a certain price level. This is called the equilibrium price. At this
point, there is no surplus or shortage. If the price is above equilibrium, a
surplus exists and prices fall. If the price is below equilibrium, a shortage
exists and prices rise.
Predicting Changes in Price and Quantity
A change in demand or supply or both demand and supply changes the
equilibrium price and the equilibrium quantity.
Change in Demand with No Change in Supply
When demand increases, equilibrium price rises and the equilibrium quantity
increases and When demand decreases, the equilibrium price falls and the
equilibrium quantity decreases
Change in Supply with No Change in Demand
When supply increases, the equilibrium price falls and the equilibrium
quantity increases.
When supply decreases, the equilibrium price rises and the equilibrium
quantity decreases.
Increase in Both Demand and Supply
An increase in demand and an increase in supply increase the equilibrium
quantity.
The change in equilibrium price is uncertain because the increase in demand
raises the equilibrium price and the increase in supply lowers it.
Decrease in Both Demand and Supply
A decrease in both demand and supply decreases the equilibrium quantity
The change in equilibrium price is uncertain because the decrease in demand
lowers the equilibrium price and the decrease in supply raises it.
5. Effect of a Change in Income on the Demand Curve
Income changes shift the demand curve:
- For normal goods: An increase in income shifts the demand curve
rightward.
- For inferior goods: An increase in income shifts the demand curve
leftward.
These changes reflect consumers’ ability and willingness to buy goods based
on income levels.
Graphs
Demand Curve
The demand curve slopes downward, indicating the inverse relationship
between price and quantity demanded.
Supply Curve
The supply curve slopes upward, reflecting the direct relationship between
price and quantity supplied.
Market Equilibrium
Market equilibrium occurs where the supply and demand curves intersect.
This determines the equilibrium price and quantity.