1.4: Supply & Demand Flashcards
1.4.1: Supply and Demand 1.4.2: Price Elasticity of Demand 1.4.3: Income Elasticity of Demand
What is demand
The amount of consumers who desire to purchase at various prices effective demand is where the consumer is both willing and able to pay
What are factors that influence demand
Changing population size, Changing consumer incomes, Changing taste, Changing price, Changing legislation and Changes in price of subs and complementary goods
What does the demand curve look like
Typically drawn sloping downwards (Price = Vertical, Demand = Horizontal) and price is the only factor that an cause movement along the demand curve
What is The Law of Demand
As price falls/rises, quantity increases/decreases (As price falls from P1 to P2 then demand rises form Q1 to Q2)
What causes shifts in demand
Any factor other than price that influences demand will cause the entire curve to shift, shift left = decrease in demand whereas shift right = demand increase even if price remains constant
What is Supply
Amount of a good or service a producer is willing to put on the market, higher the price the higher supply level due to there being the ability to make more money
What is the supply curve
Business aims to maximize profits by considering production costs and expected profit. As prices rise, firms increase supply to capitalize on potential profit, attracting additional supply and attracting new firms to the market.
What is the shape of the supply curve
Upward sloping indicates a positive relationship between supply and price. Firms increase prices to attract supply, maximizing profits. However, this increases costs, requiring suppliers to charge higher prices for resources.
What does the supply curve look like
Drawn sloping upwards, price is the only factor that can create movement
What causes shifts in supply curve
Anything other than price, changes in production, technology, weather and legislation
How does a competitive market function
The demand curve slopes downwards, indicating that more will be purchased as price falls.
The supply curve slopes upwards, indicating that more sellers enter the market as prices rise.
What is market equilibrium
The price at which demand is equal to supply and there is no tendency for change.
What is elasticity
A measure of how sensitive (response) the demand for a good or service is to a change in its price (greater demand = more elastic)
What is the formula for elasticity
% Change in Quantity Demand
% Change in PRICE
If answer is between 0 and -1: the relationship is inelastic, If the answer is between -1 and infinity: the relationship is elastic
What is elastic demand
If the demand for a good or service changes by a greater % than the % change in its price, it is elastic.
What does the elastic demand diagram look like
Even just a small increase in price will result in a dramatic decrease in the quantity demand of the good in a near perfectly competitive market.
What is inelastic demand
If the demand for a good or a service changes by a smaller % than the% change in its price then its inelastic
What does the inelastic demand diagram look like
Even a significant increase in price will result in a very small decrease in quantity demanded
If demand is price elastic then it would …
Increasing price = reduction in total revenue and vice versa
If demand is price inelastic then it would …
Increasing price = increase total revenue
and vice versa
How does elasticity work in the real world
Firms want to make the price elasticity of demand for their goods less elastic
State 2 ways you can reduce price elasticity
Strengthen Brand Power and Promote USP’s
State a benefit of Price Inelasticity
Firms are able to raise prices increasing revenue because demand will only fall by a small amount
What is income elasticity of demand
A measure of how responsive demand is to a change in the income levels of consumers
What is the difference between a normal good and a luxury good
If income rises we buy more of this, most items fall under this, whereas we buy disproportionately more luxury goods if income rises
How does supply and demand work with necessary goods
They have a Yed between 0 and +1. Demand rises with income but less than proportionately
How does supply and demand work with luxury goods
They have a Yed >+1. Demand rises more than proportionate to a change in income
What are inferior goods
Some goods will see a fall in demand when consumer incomes rise so they have a negative Yed
What is the formula for income elasticity
% change in Quantity demanded of good X
% change in income
+ answer = Normal Good
- answer = Inferior Good
What are the determinants of elasticity
Time period and Number and Closeness of Substitutes
