2. Demand and supply analysis Flashcards
market demand curve
A curve that shows us the quantity of goods that consumers are willing to buy at different prices
derived demand
Demand for a good that is derived from the production and sale of other goods
direct demand
Demand for a good that comes from the desire of buyers to directly consume the good itself
law of demand
The inverse relationship between the price of a good and the quantity demanded, when all other factors that influence demand are held fixed.
market supply curve
A curve that shows us the total quantity of goods that
their suppliers are willing to sell at different prices
law of supply
The positive relationship between price and quantity supplied, when all other factors that influence supply are held fixed
factors of production
Resources such as labor and raw materials that are used to produce a good
equilibrium
A point at which there is no tendency for the market price to change as long as exogenous variables remain
unchanged
excess supply
A situation in which the quantity supplied at a given price exceeds the quantity demanded
excess demand
A situation in which the quantity demanded at a given price exceeds the quantity supplied
The supply curve
slopes upward (at higher prices, suppliers of corn are willing to offer more corn for sale than at lower prices)
The demand curve
slopes downward (the lower the price of corn, the greater the quantity of corn demanded, and the higher the price of corn, the smaller the quantity demanded)
the four basic laws of supply and demand
- Increase in demand unchanged supply curve = higher equilibrium price and larger equilibrium quantity.
- Decrease in supply unchanged demand curve = higher equilibrium price and smaller equilibrium quantity.
- Decrease in demand unchanged supply curve = lower equilibrium price and smaller equilibrium quantity.
- Increase in supply unchanged demand curve = lower equilibrium price and larger equilibrium quantity
price elasticity of demand
A measure of the rate of percentage change of quantity demanded with respect to price, holding all other
determinants of demand constant
the value of e(Q,P)
ALWAYS be NEGATIVE, reflecting the fact that demand curves SLOPE DOWNWARD because of the INVERSE relationship of price and quantity (When price increases, quantity decreases, and vice versa)
Price elasticity of demand equal to 0
Perfectly inelastic demand
Quantity demanded is completely insensitive to price
Price elasticity of demand between 0 and -1
Inelastic demand
Quantity demanded is relatively insensitive to price
Price elasticity of demand equal to -1
Unitary elastic demand
Percentage increase in quantity demanded is equal to
percentage decrease in price
Price elasticity of demand between -1 and -INFINITTY
Elastic demand
Quantity demanded is relatively sensitive to price
Price elasticity of demand equal to -INFINITTY
Perfectly elastic demand
Any increase in price results in quantity demanded decreasing to zero, and any decrease in price results in quantity demanded increasing to infinity
linear demand curve
A demand curve in the form Q = a - bP
inverse demand curve
An equation for the demand curve that expresses price
as a function of quantity
choke price
The price at which quantity demanded falls to 0
constant elasticity Demand curve
A demand curve of the form Q = aP^(-b) where a and b
are positive constants. The term -b is the price elasticity of demand along this curve
price elasticity of demand CAN HELP WHAT FOR THE FIRMS
- deciding how to price their products or services
- the structure and nature of competition within particular industries
- determining the effect of various kinds of governmental interventions, such as price ceilings, tariffs, and import quotas
total revenue
Selling price times the quantity of product sold
PQ
total revenue will go up
the demand is inelastic (the quantity demanded is relatively insensitive to price), the quantity reduction will not be too severe
total revenue will fall
the demand is elastic (the quantity demanded is relatively sensitive to price), the quantity reduction will outweigh the benefit of the higher price
some factors that determine a product’s price elasticity of demand
- Demand tends to be more price elastic when there are good substitutes for a product
- Demand tends to be more price elastic when a consumer’s expenditure on the product is large (either in absolute terms or as a fraction of total expenditures)
- Demand tends to be less price elastic when the product is seen by consumers as being a
necessity
The distinction between market-level and brand-level elasticities
reflects the impact of substitution possibilities on the degree to which consumers are sensitive to price
Should a firm use market-level or brand-level elasticity in assessing the effect of a price change?
If a firm expects its rivals to quickly match its price change, then the market-level elasticity will provide the appropriate measure of how the demand for the firm’s product is likely to change with price.
If, by contrast, a firm expects its rivals not to match its price change (or to do so only after a long time lag),
then the brand-level elasticity is appropriate.
income elasticity of demand
The ratio of the percentage change of quantity demanded to the percentage change of income, holding price and all other determinants of demand constant
two different types of income elasticity of demand
Estimated Income Elasticity: Nonpoverty Status Households
Estimated Income Elasticity: Poverty Status Households
both types of households, the estimated income
elasticities of demand are
- positive, (the quantity demanded of the good increases as income increases)
- negative (advanced countries in Asia, such as Japan and Taiwan, the income elasticity of demand for rice is negative)
cross-price elasticity of demand
The ratio of the percentage change of the quantity of one good demanded with respect to the percentage change in
the price of another good
Cross-price elasticity can be
positive or negative
Cross-price elasticity is positive
a higher price for good j increases the quantity of good i demanded. In this case, goods i and j are demand substitutes
demand substitutes
Two goods related in such a way that if the price of one increases, demand for the other increases
Cross-price elasticity is negative
a higher price for good j decreases the quantity of good i demanded
demand complements
Two goods related in such a way that if the price of one increases, demand for the other decreases
price elasticity of supply
The percentage change in quantity supplied for each percent change in price, holding all other determinants of supply constant
firm-level price elasticity of supply
the sensitivity of an individual firm’s supply to price
the market-level price elasticity of supply
the sensitivity of market supply to price
long-run demand curve
The demand curve that pertains to the period of time in which consumers can fully adjust their purchase decisions to changes in price.
short-run demand curve
The demand curve that pertains to the period of time in which consumers cannot fully adjust their purchase decisions to changes in price
The long-run demand curve is (*) than the short-run demand curve
“flatter”
long-run supply curve
The supply curve that pertains to the period of time in which producers can fully adjust their supply decisions
to changes in price
short-run supply curve
The supply curve that pertains to the period of time in which sellers cannot fully adjust their supply decisions in response to changes in price
durable goods
Goods, such as automobiles or airplanes, that provide
valuable services over many years
the long-run supply curve is (*) than the short-run supply curve
flatter
long-run market demand can be (1) than short-run demand, (2) what certain goods?
- less elastic
2. durable goods––that provide valuable services over many years
demand for new commercial aircraft in the long run might be relatively price (1), in the short run (within 2 or 3 years of the price change), demand would be
relatively (2)
- inelastic
2. more elastic
