2nd Week Flashcards
Law of demand
As the price increases the quantity demanded decreases
Law of supply
As the price increases the quantity supplied increases (ceteris paribus)
Change in demand
Shift of the curve
Change in quantity demanded
Movement along the curve
Increase in demand
-Income increases (normal good)
-Income decreases (inferior good)
-Price of a substitute rises
-Price of compliment decreases
-…
Price elasticity of demand (ped)
is a measure of how sensitive is the quantity demanded to changes in prices. (Price elasticity of demand is always negative (except when is zero))
When prices increases(ped):
Revenues will increase if the demand is inelastic.
Revenues will decrease if the demand is elastic.
Inelastic demand
(Ep > -1 or │Ep│< 1)
Elastic Demand
(Ep < -1 or │Ep│> 1)
Unitary
(Ep = -1 or │Ep│= 1)
INCOME DEMAND ELASTICITY
Income elasticity shows how sensitive is the quantity demanded to changes in the level of
income
Normal goods (IDE)
Normal goods: When income increases the quantity demanded also increases. So income elasticity is positive.
Luxury goods (IDE)
income elasticity is more than one
necessity goods (IDE)
income elasticity is less than one, but positive, we consider it a necessity
Inferior goods (IDE)
An inferior good shows a negative income elasticity, income and quantity demanded move in opposite directions.
Giffen good
A good is Giffen Good when the price and the demand increase simultaniasly
The cross-price elasticity (XED)
shows how the quantity demanded of good X changes when
there is a change in the price of a good Y.
Substitute goods show a positive cross price elasticity
Complement goods show a negative cross price elasticity.
The quantity supplied will depend on
name some examples
The available technology and the level of productivity.
The number of firms in the market.
The price of the product. The relation is expected to be a positive one, a higher price will make the product more profitable, so quantity supplied will increase.
The price of other products that the firm can easily change form the one is now producing.
The cost structure. (Marginal costs have an impact, a fixed cost has no any consequence on supply)
Change in quantity supplied
The quantity changes when there is a change in price. It tends to show a positive slope.
Change in supply
The supply will shift to the right or to the left when there is a change in other factors apart from the price, some could be: a change in the number of firms operating in the market, a change in variable cost, technological change, the shortage of a production factor, etc.
Increase in supply
-More and more firms enter the market
-An increase in productivity
-A reduction in wages
-A reduction in the amount of production factors
Price elasticity of supply
The PES measures the sensitiveness of quantity supplied to changes in the level of prices. As a consequence of the positive slope of the Supply function, the PES is positive (it could be 0 if the supply is totally inelastic).
