1.2 the market Flashcards
format of a supply and demand diagram graph
- price on y axis
- quantity on x axis
- demand curves down from left to right
- supply curves up from left to right
on the supply and demand diagram graph, what does the DEMAND curve mean
- as the price of the product increases, the demand decreases
- bc at a higher price less buyers will be able to buy the product so demand is lower
on the supply and demand diagram graph, what does the SUPPLY curve mean
- ## the higher the price charged, the higher the quantity supplied
What is the equilibrium price (market clearing price)
- when the quantity that buyers demand is the same as the quantity the sellers wish to supply
- where the two lines meet on the graph (a point in the middle)
when does a surplus occur
- price increases
- when the quantity demanded is less than supplied - excess supply = SURPLUS
what would happen on the supply and demand graph if the PRICE of a product INCREASED
- MOVEMENT right on the supply curve
- MOVEMENT left for demand curve
- therefore quantity demanded is less than supplied so there is excess supply - SURPLUS
what would happen on the supply and demand graph if the PRICE of a product DECREASED
- MOVEMENT left on the supply curve
- MOVEMENT right on the demand curve
- more demand than supply
- therefore excess damand - creates. SHORTAGE in the market
when does a shortage occur
- price decreases
- when there is more demand than supply
8 factors that influence a change in demand
- substitutes - (cost of margarine increased, demand for butter would rise)
- complementary products - demand for printers falls, ink falls too
- consumer income - fall in income, higher demand for cheap goods
- consumer tastes - diets, fall in demand for sweets
- advertising and branding
- demographics - better healthcare, higher demand for old ppl stuff
- seasonal changes
- external shock - flooding - increase in sandbags etc
6 factors that influence a change in supply
- costs of production - less profit so less supply
- Indirect taxes - taxes on goods or services. if tax increases supply decreases
- Subsidies - if businesses are given subsidies then supply increases
- new technology - more efficient and cost-effective - increase supply
- weather conditions - sun for farming - increase supply etc
- external shock - war, disrupt businesses - may have to make weapons instead etc
rise in demand…
demand curve shifts right
fall in demand…
demand curve shifts left
rise in supply…
supply curve shifts right
fall in supply…
supply curve shifts left
formula for price elasticity of demand (PED)
% change in quantity demanded / % change in price
what is the meaning of price elasticity of demand
- how much the price change affects the demand
- always negative
the product is price elastic if….
the PED is GREATER than 1 (ignoring the minus)
the product is price inelastic if….
the PED is less than 1
price elastic products
for price elastic products the % change of demand is GREATER than the % change in price
price inelastic products
for price inelastic products the % change in demand is LESS than the % change in price
price elastic meaning
- demand changes a lot with small changes in price
- if the price goes up, people buy much less; if the price goes down, people buy much more.
- non - essential items
price inelastic meaning
- demand doesn’t change much even if the price does
- If the price goes up or down, people still buy roughly the same amount.
- essential goods (like fuel or medicine) that people need regardless of price changes.
what does a demand curve look like for price elasticity and inelasticity
elastic - shallow curve = demand is dependent on price
inelastic - steep = demand is not dependent on price and small change in price wont rly effect demand
if you increase/decrease the price of a price ELASTIC product, what happens to the sales revenue?
- price increase will make sales revenue go down.
- the money lost from % decrease in sales is more than money gained from % increase in price
- small price decrease will largely increase demand so increase sales revenue
if you increase/decrease the price of a price INELASTIC product, what happens to the sales revenue?
- increasing price will increase sales revenue
- bc the money lost from the % decrease in sales, will be less than the money gained from the % increase in price.
- decreasing price will decrease sales revenue bc the sales increase slightly but the price decreases effects it way more.
formula and name for income elasticity of demand
YED
% change in the quantity demanded / % change in income
how can someones income change
- changing jobs
- promotion
- pay rise
- dismissed
- average income increases during economic growth
- average income decreases during economic decline (recession)
if the YED is between 0-1….
- necessity products (fruit and vegetables)
- positive YED
- means that if income rises demand rises
- demand rises at a SLOWER RATE than income
if the YED is 1+ (higher than 1)
- luxury product (designer clothes/ fine wine)
- positive YED
- demand rises FASTER than the rise in income
if the YED is less than 0 (negative)
- inferior product (Aldi’s own brand baked beans)
- demand falls when income increases
- demand rises when income falls
