2.2 How Markets Work Flashcards
What is Demand?
The want and willingness of consumers to buy a good or services at a given price
What is effective demand
Effective demand is where the willingness to buy is backed by the ability to pay
What does the law of demand state?
An increase in price leads to a decrease in demand, and a decrease in price leads to an increase in demand
What is extension in demand?
The increase in demand due to changes in price (without changes in other factors)
What is contraction in demand?
The decrease in demand due to the changes in price (without the changes in other factors)
What causes a shift to the right on a demand curve?
A rise in the demand for a product due to the changes in other factors (excluding price)
What causes a shift to the left on a demand curve?
A fall in demand for a product due to the changes in other factors (excluding price)
What are the factors that cause shifts in demand curve?
Consumer Incomes Taxes on incomes Price of substitutes Price of complements Changes in consumer tastes and fashion Degree of Advertising Change in population
What are Substitutes?
Goods that can be used instead of a particular product.
What are Complements?
Goods that are used along with another product
What is Supply?
The want and willingness of producers to supply a good or services at a given price
What is quantity supplied?
The amount of goods or services producers are willing to make and supply
What does the law of supply state?
An increase in price leads to a increase in supply, and a decrease in price leads to an decrease in supply.
What is Extension in Supply?
The increase in supply due to changes in price (without changes in other factors)
What is Contraction in Supply?
The decrease in supply due to the changes in price (without the changes in other factors)
What causes a shift to the right on a supply curve?
A rise in the supply for a product due to the changes in other factors (excluding price)
What causes a shift to the left on a supply curve?
A fall in the supply for a product due to the changes in other factors (excluding price)
What are the factors that cause shifts in Supply Curves?
Changes in cost of production
Changes in the quantity of resources available
Technological changes
The profitability of other products
What is the Equilibrium Price?
The price at which the demand and supply curves meet
What is the Disequilibrium Price?
The price at which market demand and supply curves do not meet
When is Surplus Experienced?
When the price is above the equilibrium price
When is Shortage Experienced?
When the price is below the equilibrium price
What is Price Elasticity of Demand(PED)?
The responsiveness of the quantity demanded for it to changes in it’s price.
What is the PED formula?
% change in quantity demanded / % change in price
What is Price Elastic Demand?
When a change in price makes a higher change in quantity demanded
What is Price Inelastic Demand?
When a change in price makes a smaller change in demand.
What is Unitary Price Elastic Demand?
When the % change in demand and price are equal
What is Infinitely Price Elastic Demand?
When the quantity demanded changes without any changes in price itself
What happens when elasticity reaches zero?(Perfectly Price Inelastic Demand)
The price changes have no effect on demand whatsoever
What affects PED?
No. of substitutes
Time period
Proportion of Income spend on commodity
How is PED helpful to producers?
Producers can calculate the PED of their product and take a suitable action to make the product more profitable.
What is Price Elasticity of Supply(PES)?
The responsiveness of the quantity supplied it to changes in it’s price
What is the PES formula?
%change in quantity supplied / %change in price
What affects PES?
Time of Production
Availibility of resources
