Complete the Topic 6 Short Answer Questions Worksheet.It wi…

Topic 6 Short Answer Questions

1. Explain the concept of supply and demand and how it determines the equilibrium price and quantity in a market.

The concept of supply and demand is the fundamental principle behind market economics. It refers to the relationship between the quantity of a good or service that is available (supply) and the quantity that is desired by consumers (demand). In a competitive market, the interaction between supply and demand determines the equilibrium price and quantity.

When the price of a good or service is high, the demand for it tends to be lower, as consumers are less willing to purchase it at that price. Conversely, when the price is low, the demand is higher, as consumers are more willing to buy it. This inverse relationship is illustrated by the demand curve, which slopes downward.

On the other hand, the supply of a good or service generally increases as its price increases. Suppliers are more motivated to produce and sell a product if they can obtain higher profits from it. In contrast, as the price decreases, the incentive to supply the product diminishes. This positive relationship between price and supply is illustrated by the supply curve, which slopes upward.

The equilibrium price and quantity occur at the point where the demand curve intersects with the supply curve. At this point, the quantity demanded by consumers is equal to the quantity supplied by suppliers, resulting in market equilibrium. The equilibrium price is determined by the intersection of the supply and demand curves, and it is the only price at which there is no shortage or surplus of the product in the market.

2. Explain the concept of elasticity of demand and how it affects the responsiveness of quantity demanded to changes in price.

The concept of elasticity of demand measures the responsiveness of the quantity demanded to changes in price. It indicates the extent to which consumers adjust their demand for a good or service when the price changes. Elasticity is calculated as the percentage change in quantity demanded divided by the percentage change in price.

If the demand for a good or service is elastic, it means that consumers are highly responsive to changes in price. A small change in price will lead to a proportionately larger change in quantity demanded. This is often the case for goods or services that have readily available substitutes. For example, if the price of one brand of coffee increases, consumers are more likely to switch to a different brand, resulting in a significant decrease in quantity demanded.

On the other hand, if the demand is inelastic, it means that consumers are less responsive to changes in price. A change in price will lead to a proportionately smaller change in quantity demanded. This is often the case for goods or services that have limited substitutes or are considered necessities. For example, the demand for prescription medications is typically inelastic, as consumers may have limited alternatives and must purchase them regardless of price changes.

Understanding the elasticity of demand is crucial for businesses and policymakers. If demand is elastic, a price decrease can lead to increased revenue, as the increase in quantity demanded may compensate for the lower price per unit. Conversely, if demand is inelastic, a price increase can lead to increased revenue, as the proportionally smaller decrease in quantity demanded may outweigh the negative impact of the higher price per unit.

In summary, the concept of elasticity of demand measures the responsiveness of quantity demanded to changes in price. It determines the degree to which consumers adjust their demand based on price fluctuations. Understanding elasticity is essential for businesses and policymakers to make informed decisions regarding pricing and revenue maximization.