1.2 How Markets Work Flashcards
What shifts demand (D)?
PASIFIC:
Population
Advertising
Substitutes (competition)
Income
Fashion/ taste
Interest rates (cheaper to borrow when low)
Complement price (something similar with it)
What shifts supply (S)?
PINTSWC:
Productivity
Indirect tax
Number of firms
Technology
Subsidy
Weather (for agriculture etc.)
Costs of production - transport, raw materials, labour, regulation, utilities etc.
What are the 4 elasticities?
Price of demand (PED) Price elasticity of supply (PES) Income elasticity of demand (YED) Cross elasticity of demand (XED)
Price of demand (PED)
the responsiveness of demand compared to how prices change PED = %△Q demanded/%△price
Price elasticity of supply (PES)
the responsiveness of Q supplied compared to how prices change PES = %△Q supplied/%△price
Income elasticity of demand (YED)
the responsiveness of Q demanded compared to how income changes
YED = %△Q demanded/%△income
Cross elasticity of demand (XED)
the responsiveness of Q demanded compared to how price of another good changes
XED = %△Q demanded of X/%△price in Y
What will XED be for substitutes?
Demand for substitutes will increase if price of product increases So XED is positive
What will XED be for complements?
Demand for complements will decrease if price of product increases So XED is negative
Normal goods
goods that increase in demand when income increases
Inferior goods
goods that decrease in demand when income rises
What affects PED?
SPLAT:
Substitution
Percentage of income
Luxury/ necessity
Addictive/ Habit forming
Time period
What affects YED?
Availability of substitutes for the producer
Time period - shorter time, harder to switch
short run
long run
How do taxes effect supply?
Supply shifts up to the left
the tax revenue is the box from the new equilibrium down to the old curve
Consumers pay the price difference, producers pay the rest
producers at bottom, consumers on top
How do subsidies affect supply?
Supply shifts down to the right
Total subsidy is from the new equilibrium up to the old curve
Consumers pay the price difference
consumers at bottom, producers at top
Rationing function
When supply is limited, the price can be rationed up as there will be less demand.
Signalling function
When price changes influence decisions to buy/ sell
Incentive function
changes in price encourage producers to supply more, because of the possibility of greater profit
