1.2.2-1.2.4 - Demand, PED/IED/XED & Market Supply Flashcards
what is the ‘substitution effect’?
- price dec. in good X makes it cheaper compared to substitutes
- consumers may switch to good X → higher demand (depends on whether products are close substitutes)
what is the ‘income effect’?
- fall in price -> inc. real income of consumers
- allows people to buy more w/ a given budget. For normal goods, demand rises w/ an inc. in real income.
what are the causes of shifts in the demand curve?
PIRATES:
- population
- changes in real income
- changes in the prices of related goods/substitutes/complements
- advertising
- changes in tastes + fashion
- expectations
- seasons
factors of PED
- no. of close substitutes available for consumers → more close substitutes = more price elastic
- price of product in relation to income → high % -> demand = more price sensitive
- cost of substituting between diff. products → switching costs = high, demand = price inelastic
- brand loyalty + habitual consumption → high levels of brand loyalty - less price elastic demand; persuasive advertising can make demand price inelastic.
- degree of necessity/ luxury → necessities have a lower PED whereas luxuries are an optional spend
- addictiveness of the product
- time + price of the product as a proportion of income
limitations of elasticities
- problems w/ inaccurate or incomplete data collection
- consumer price sensitivity changes overtime
- elasticity of demand varies by region/time
- not all businesses are profit maximisers
- elasticity varies within product ranges e.g. economy + premium products
factors of PES
- spare production capacity → if there’s plenty of spare capacity then a business can inc. output without a rise in costs + supply will be elastic in response to a change in price
- stocks of finished products + components → if stocks = high, a firm can respond to a change in demand -> supply = elastic. perishable goods are harder to store
- ease + cost of factor substitution/factor mobility → capital + labour = occupationally mobile, PES is likely to be higher -> resources can be mobilised to supply the extra output e.g. the reallocation of workers to new tasks
- time period + production speed → supply = more elastic -> the longer the time that a firm is allowed to adjust its production levels
what’s the coefficient of XED when the goods are unrelated?
0
what’s the coefficient of XED when it’s a complement?
less than 0 (-ve)
what’s the coefficient of XED when it’s a substitute?
more than 0 (+ve)
what is meant by ‘composite demand’?
where goods have more than one use → inc. demand for one product, dec. the supply of the other
e.g. milk is used for cheese, butter, yoghurt, etc.
what are the factors influencing a shift in market supply?
- changes in unit costs of production -> lower unit costs -> business can supply more at each price -> incr productivity -> outward shift (and vice versa, e.g. a fall in wage rates/energy prices/raw materials
- depreciation in exchange rate -> incr prices of imported components
- advancements in technologies -> incr productivity -> outward shift
- entry of new producers into the market -> outward shift
- weather -> if weather is favourable (e.g. for agricultural products) -> incr supply
- indirect taxes -> inward shift
- subsidies -> outward shift
- price of other goods
what is the law of diminishing marginal utility
the satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed
