1.2 - Market Flashcards
Demand
Quantity of a good or service that consumers are willing and able to buy at a given price over a specific period of time
Basic law of demand
As the price of a good or service decreases, the quantity demanded increases, and as the price increases, the quantity demanded decreases. This creates an inverse relationship between price and demand
Factors causing a shift in the demand curve
- Income levels
- Consumer tastes and preferences
- Seasonal factors
- Price of substitutes and complements
- External shocks
Substitute goods
Products that can replace each other because they fulfill the same need or function. If the price of one substitute increases, demand for the other is likely to rise
Complementary goods
Products that are typically used together, meaning that an increase in demand for one leads to an increase in demand for the other or if the price of one complementary good rises, demand for both may fall
Normal goods
Goods for which demand increases as consumer income rises and decreases when income falls
Inferior goods
Goods for which demand decreases as consumer income rises and increases when income falls
Luxury goods
High-quality, often expensive products for which demand increases more than proportionally as consumer income rises
Supply
The quantity of a good or service that producers are willing and able to offer for sale at a given price over a specific period of time
Basic law of supply
As the price of a good or service increases, the quantity supplied increases, and as the price decreases, the quantity supplied decreases. This creates a direct (positive) relationship between price and supply
Factors causing a shift in the supply curve
- Changes in production costs
- Technological advances
- External shocks
- Government policies
Subsidy
Financial payment or benefit provided by the government to businesses or industries to reduce production costs and encourage supply. Subsidies help lower prices for consumers, support economic growth, and promote specific industries, such as renewable energy or agriculture
Market equilibrium
Point where demand and supply are equal, meaning the quantity of a good or service consumers are willing to buy matches the quantity producers are willing to supply at a given price
Excess demand
When the quantity demanded of a good or service exceeds the quantity supplied at a given price, creating a shortage in the market
Excess supply
When the quantity supplied of a good or service exceeds the quantity demanded at a given price, creating a surplus in the market
Price Elasticity of Demand
Measures how responsive the quantity demanded of a good or service is to a change in its price
Formula for Price Elasticity of Demand
% Change in quantity demanded / % Change in price
Price elastic
A good which is very responsive to a change in price, meaning that the change in demand is greater than the change in price and PED>1
Price inelastic
A good which is unresponsive to a change in price, meaning that the change in price is greater than the change in demand and PED<1
Factors influencing Price Elasticity of Demand
- Availability of substitutes
- Necessity vs. Luxury
- Proportion of income spent
- Brand loyalty
- Time period
Income Elasticity of Demand
Measures how responsive the quantity demanded of a good or service is to a change in consumer income
Formula for Income Elasticity of Demand
% Change in quantity demanded / % Change in income
Income elastic
Demand changes more than proportionally in response to a change in income, meaning that YED>1
Income inelastic
Demand changes less than proportionally in response to a change in income, meaning that YED is between 0 and 1
Factors influencing Income Elasticity of Demand
- Necessity vs. Luxury
- Proportion of income spent
- Time period
- Consumer preferences
- Availability of substitutes
