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Sustainable Economics > 2.1 - Supply & Demand On Competitve Markets > Flashcards

2.1 - Supply & Demand On Competitve Markets Flashcards

1
Q

What is a market in economics?

A

A market consists of buyers and sellers of specific goods or services who interact with one another.

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2
Q

What are the key characteristics of perfect competition?

A
  • Homogeneous products
  • Many buyers and sellers with no price influence
  • All participants are price takers
  • Perfect information and quick behavioral adjustments
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3
Q

What determines demand elasticity?

A
  • Price level
  • Availability of substitutes
  • Time horizon
  • Necessity vs luxury status of good
  • Proportion of income spent
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4
Q

What’s the difference between elastic and inelastic demand? How do the curves look?

A

Elastic demand means quantity demanded changes strongly in response to price (elasticity > 1). The curve is flatter. Change in one unit of price leads to more than one unit of change in Qd

Inelastic demand shows weak response to price changes (elasticity < 1). The curve is steeper. Change in one unit of price leads to less than one unit of change in Qd

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5
Q

How do you calculate arc elasticity?

A

Arc elasticity = ((Q2-Q1)/((Q1+Q2)/2)) ÷ ((P2-P1)/((P1+P2)/2))

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6
Q

How does elasticity affect total revenue?

A
  • For inelastic demand: price increase leads to total revenue increase
  • For elastic demand: price increase leads to total revenue decrease
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7
Q

What is income elasticity of demand?

A

It measures how much the quantity demanded of a good responds to changes in consumer income.

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8
Q

What’s the difference between normal and inferior good in terms of income elasticity?

A

Normal goods have positive income elasticity (demand increases with income), while inferior goods have negative income elasticity (demand decreases with income).

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9
Q

What is cross-price elasticity? How do you calculate it?

A

It measures how the quantity demanded of one good changes when the price of another good changes.

Formula: Cross-Price Elasticity = (% Change in Qd of Good 1) / (% Change in Price of Good 2)

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10
Q

What is the Law of Supply?

A

All other things equal, the quantity supplied of a good rises with the price of that good.

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11
Q

What causes shifts in the supply curve?

A
  • Input prices
  • Technology changes
  • Expectations
  • Number of sellers
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12
Q

What is market equilibrium?

A

It’s the situation where quantity supplied equals quantity demanded, occurring at the market clearing price.

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13
Q

What is a market surplus? What happens in the market?

A

A surplus occurs when price is above equilibrium, leading to quantity supplied exceeding quantity demanded.

suppliers will thus lower the price to increase sales and to move the market towards equilibrium

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14
Q

What is a market shortage? What happens in the market?

A

A shortage occurs when price is below equilibrium, leading to quantity demanded exceeding quantity supplied.

suppliers will raise prices due to too many buyers chasing too few goods, thus moving the market back to equilibrium

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15
Q

What is the Law of Supply and Demand?

A

The price of any good will adjust to bring the market into equilibrium where quantity supplied equals quantity demanded.

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16
Q

What are price controls?

A

Government-imposed restrictions on prices, including price ceilings (maximum prices) and price floors (minimum prices).

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17
Q

When is a price ceiling binding?

A

A price ceiling is binding when it’s set below the equilibrium price, causing a shortage.

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18
Q

When is a price floor binding?

A

A price floor is binding when it’s set above the equilibrium price, causing a surplus.

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19
Q

How do taxes affect market equilibrium?

A

Taxes create a wedge between buyer and seller prices, reducing market size and sharing the burden between market participants based on elasticities.

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20
Q

What is tax incidence?

A

Tax incidence describes how the burden of a tax is shared between market participants, influenced by the elasticities of supply and demand.

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21
Q

Explain supply and demand

A
  • reflect market participant behavior → as people interact with one another in markets
  • Buyers determine demand, sellers determine supply
22
Q

What is a monopoly?

A

Single seller controls price

23
Q

What is an oligopoly?

A

Oligopoly: Few sellers, not always aggressive competition as they may reach agreed upon market share

24
Q

What is quantity demanded?

A

Amount of a good buyers are willing and able to purchase

25
Q

What is the law of demand?

A
  • states that, other things equal, the quantity demanded of a good falls when price rises
  • is an inverse relationship
26
Q

What does the demand curve show? Draw it out if you can.

A

shows price-quantity demanded relationship

27
Q

What is market demand?

A

Sum of all individual demands

28
Q

What are the determinants of demand and how do they affect it?

A
  • Movement along the demand curve → change in Qd
    • Price
  • Shift the demand curve
    • Consumer income
      • Normal goods: Demand increases with income
      • Inferior goods: Demand decreases with income
    • Prices of related goods
      • Substitutes: Price decrease in one reduces demand for other
      • Complements: Price decrease in one increases demand for other
    • Tastes
    • Expectations
    • Number of buyers
29
Q

What is the price elasticity of demand? How is it calculated?

A
  • Measures how much the quantity demanded of a good responds to price changes
  • Calculation: PED = (% Change in Qd) / (% Change in P)
30
Q

What is unit elastic?

A
  • Unit elastic: Proportional response of Qd to price (elasticity = 1)
    • change in one unit of price leads to exactly one unit of change in Qd
31
Q

What is perfectly elastic demand? How does the curve look?

A
  • Perfectly elastic: Infinite response of Qd to price
    • any change in price leads to Qd infinitely changing
  • Horizontal demand curve
32
Q

What is perfectly inelastic demand? How does the curve look?

A
  • Perfectly inelastic: No response of Qd to price
    • no change in Qd despite change in price
  • Vertical demand curve
33
Q

What is arc elasticity?

A
  • Arc Elasticity
    • Measures elasticity between two points on a demand curve
    • Uses average price and quantity between two points (average of two points)
    • More accurate for larger price changes
34
Q

What is point elasticity? How is it calculated?

A
  • Measures elasticity at a specific point on the demand curve
  • Uses calculus (differentiation)
  • More accurate for very small price changes
  • Formula: (dQ/dP) × (P/Q)
35
Q

How is the elasticity on a single linear demand curve?

A

Changes along the curve
- demand is elastic when there are high prices and low quantities
- demand is inelastic when there are low prices and high quantities

36
Q

What is total revenue? How do you calculate it?

A
  • amount paid by buyers and received by sellers of a good
  • also known as expenditures (buyer side)
  • Equation: TR = P * Q
37
Q

How does demand elasticity affect total revenue?

A
  • when demand is inelastic → increase in price leads to proportionally smaller decrease in Qd → total revenue increases
  • when demand is elastic → increase in price leads to proportionally larger decrease in Qd → total revenue decreases
38
Q

Income elasticity formula

A

Formula: Income Elasticity = (% Change in Qd) / (% Change in Income)

39
Q

What’s the difference between luxury goods and necessities in terms of income elasticity?

A
  • Elasticity > 1: Luxury good - demand increases more than proportionally with income
    • referred to as income elastic goods
  • 0 < Elasticity < 1: Necessity - demand increases less than proportionally with income
    • referred to as income inelastic goods
40
Q

How does cross-price elasticity relate to substitute and complementary goods?

A
  • Positive elasticity: Substitute goods (when price of good 2 increases, demand for good 1 increases)
  • Negative elasticity: Complementary goods (when price of good 2 increases, demand for good 1 decreases)
41
Q

What is the quantity supplied?

A

Quantity supplied (Qs): Amount of a good sellers are willing and able to sell

42
Q

What is the law of supply?

A

All other things equal, the quantity supplied of a good rises with the price of a good

43
Q

What does the supply curve show? Draw it out if you can.

A

Supply curve → shows the relationship between price of a good and the Qs

44
Q

What is the market supply?

A

Sum of all individual supplies

45
Q

What are the determinants of supply? How do they affect supply curve?

A
  • Movement along the supply curve (change in Qs)
    • Price
  • Shifts the supply curve (to the left or right) → change in supply
    • Input prices
    • Technology
    • Expectations
    • Number of sellers
46
Q

What is the equilibrium price?

A
  • equilibrium price → the price that balances Qs and Qd
    • also known as market clearing price
    • price where the supply and demand curves intersect and where the equilibrium price has been achieved
47
Q

How could minimum wage affect the market?

A
  • Example of price floors
  • could lead to labor surplus (unemployment)
    • not actually empirically proven to be the case though
48
Q

What does a tax do to the market?

A

It reduces the size of the market

49
Q

Explain what a tax on buyers does to the market. Give some examples.

A
  • tax on buyers → shifts the demand curve downwards (decreases demand) by the size of the tax
    • e.g. value added tax, tax on cigarettes
50
Q

What does a tax on sellers do to the market? Give an example.

A
  • tax on sellers → shifts the supply curve upward (decreases supply) by the size of the tax
    • e.g. tax when selling houses

Sustainable Economics (8 decks)

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