1.2 - Market Flashcards
Demand
The number of goods/services customers are willing to buy at a given price.
Relationship between quantity and price
Inverse relationship.
As price rises, quantity demanded decreases.
Factors leading to change in demand
Changes in income
External shocks
Seasonality
Changes in fashion and tastes
Price of other goods (compliments and substitutes).
Supply
The number of goods/services businesses are willing to sell at a given price in a specific time period.
Relationship between supply and price
Direct relationship.
As price increases, quantity supplied increases.
Factors leading to changing in supply
Changes in cost of production
External shocks
Govt. subsidies
Indirect taxes
New technology
Supply demand curve
Fall moves left, rise moves right.
P long tail so goes down.
D goes down
S up (superman)
Price elasticity of demand (PED)
When there is an increase in price, there will be a fall in the quantity demanded.
Fall in price = rise in quantity demanded.
PED formula
(% change in quantity demanded) / (% change in price)
Percentage change
(New value - old value) / Old value (x100)
Numerical value of PED
Indicates the responsiveness of a change in quantity demanded to a change in price.
Value for elastic and inelastic product (PED)
Over 1 = elastic
Between 0 and 1 = inelastic.
Income elasticity of demand (YED)
How responsive the change in quantity demanded is to a change in income.
YED calculation
(% change in quantity demanded) / (% change in income)
YED values
Over 1 = luxury good
0-1 = Necessity
Under 0 = Inferior product
