1.2 the market Flashcards
Price definition
What the buyer pays for a specific good or service
What is quantity demanded ?
The total amount of a good or service that consumers want over a given period of time.
What is the effect of income on a normal good ?
Increased income will lead to an increase in quantity demanded
What is the effect of income on quantity of an inferior good ?
Increased income may lead to a reduction in quantity demanded
What is the demand curve ?
A line showing the demand for a product at different prices
Equilibrium definition
The point where there is a balance between supply and demand
Name 4 factors that increase supply
-price rise
-increase in productivity
-fall in indirect tax
-developments in technology
What does a supply curve show ?
The relationship between price and quantity
Numerically what does price elastic demand look like ?
-1 and below
Numerically what does price inelastic demand look like ?
Between 0 and -1
What is the impact of price rise on a product with price elastic demand
Sales with decrease quickly therefore revenue decreases
What is the impact of price rise on a product with price inelastic demand ?
Sales fall slightly, but revenue rises
What is the impact of a price cut on a product with elastic demand ?
Sales rise sharply therefore revenue rises
What is the impact of a price cut on a product with price inelastic demand ?
Sales rise but not much, therefore revenue falls
Price elasticity formula
Price elasticity= % change in the quantity demanded /% change in price
What is price elasticity?
Price elasticity measures the extent to which demand for a product changes when it’s price changes
What happens to demand when price increases ?
Demand decreases
What happens to demand when price decreases
Demand increases
What happens to the total revenue of a price elastic product, if the price increases ?
The total revenue decreases
What happens to the total revenue of a price elastic product, if the price decreases ?
Total revenue increases
What happens to the total revenue of a price inelastic product, if the price increases ?
The total revenue Increases
What happens to the total revenue of a price inelastic product, if the price decreases ?
Total revenue decreases
Factors leading to change in demand (5)
-price of substitutes
-consumer incomes
-advertising
-external shocks
-seasonality
What are complimentary goods ?
Goods that are purchased together because they are consumed together
Subsidies defintion
A grant which is given to producers, usually to encourage production of a certain good
Substitute goods definition
Goods that can be bought as an alternative to others but perform the same function
What is income elasticity of demand ?
Income elasticity of demand (YED) measures the responsiveness of quantity demanded to a change in consumer income.
Income elasticity of demand (YED) formula
% change in quantity demanded/ % change in income
For YED, if the calculated number is positive an increase in income will…………. demand
and if the calculated number is negative an increase in income will ………….. demand
Increase
Decrease
What is a normal good ?
Example
A good that experiences increase in demand due to an increase in consumer income
E.g Milk
What is an inferior good?
Example.
An inferior good is one whose demand drops when peoples income rises
E.g instant noodles
What is a Luxury good ?
A luxury good is a good for which demand increase more than proportionally as income rises.
