3.1.3-How prices are determined Flashcards
What is a contraction in demand?
A movement along the demand curve to the left (lower price and lower quantity demanded).
What is demand?
A consumer’s willingness and ability to pay a price for a specific good or service
What is the demand curve?
A graph that shows the different quanties of a product demanded at different price levels
What is disposable income?
The money available after paying taxes that you choose how to use
What is effective demand?
The financial ability to actually purchase the product
What are indirect taxes?
Taxation on spending (VAT, excise duties, import taxes)
What is individual demand?
The amount a single person would be willing to buy at a range of prices
What is infrastructure?
Basic systems governments need to make economic activity possible
What is an inverse relationship?
When one variable goes up the other variable goes down and vice versa
What is market demand?
The total demand for a product
What is a movement in the demand curve?
When a change in price causes a new point on the existing curve
What is a shift in the demand curve?
When an increase of a non-price variable moves the entire curve to a new location
What is a contraction in supply?
A movement along the supply curve to the left (higher price and lower quantity supplied)
What is a proportionate relationship?
When one variable goes up the other goes up as well and vice versa
What is supply?
The number of goods/services firms are able and willing to supply at a range of prices
What is the supply curve?
A graph that shows the different quantities of a product supplied different price levels
What does volatile mean?
Changing quickly or suddenly
What is equilibrium price?
The point at which quantity demanded and quantities supplied are equal
What is excess demand?
Where quantity demanded for a good or service exceeds supply, resulting in shortages and higher prices
What is excess supply?
Where quantity supplied of a good or service exceeds demand resulting in excess and lower prices
What is an extension in demand?
A movement along the demand curve to the right (higher price and higher quantity demanded)
What is an extension in supply?
A movement along the supply curve to the right (lower price and higher quantity supplied)
What is the market clearing price?
The price at which the amount supplied matches the exact amount demanded
What are complementary goods?
Goods that are purchased to support/go with another product
What are inferior goods?
Goods that consumers demand less of as incomes increase due to them opting to buy higher quality alternatives
What are normal goods?
Goods for which demand will increase if incomes increase or fall if incomes fall
What are substitutes?
Goods or services that can be used to replace one another
What is elasticity?
The responsiveness of quantity supplied or demanded in relation to changes in price/income/other products
What is perfect elasticity?
Where quantity demanded is extremely sensitive to changes in price.
What is price elastic demand?
When the PED is greater than 1 and quantity demanded is very responsive to changes in price
What is price elasticity of demand (PED)?
The responsiveness in quantity demanded to a change in price
What is price inelastic demand?
Where PED is less than 1 and quantity demanded is not very responsive to a change in price
What is a FMCG?
A fast-moving consumer good-goods that sell very fast and in large quantities
What is price elastic supply?
When PES is greater than 1 and quantity supplied is very responsive to changes in price
What is price elasticity of supply (PES)?
The responsiveness in quantity supplied to a change in price
What is price inelastic supply?
When PES is less than one and quantity supplied is not very responsive to changes in price
What are raw materials?
Substances used to make other things
What factors would cause a rightward shift in the demand curve? [7]
- An increase in the price of a substitute good
- A fall in the price of a complimentary good
- An increase in personal disposable income
- A reduction in interest rates
- A successful advertising campaign
- An increase in population size
- The product becoming tasteful or fashionable
What factos would cause a leftward shift in the demand curve? [7]
- A decrease in the price of a substitute good
- An increase in the price of a complimentary good
- A decrease in personal disposable income
- An increase in interest rates
- Lack of advertisement
- A decrease in population size
- Tastes and fashion shifting away from the product
What factors would cause a rightward shift in the supply curve? [7]
- Lowered costs of production
- New technology
- Decreased taxes
- Increased subsidies
- Improved weather
- Prices of complimentary goods increasing
- More firms in an industry
What factors would cause a leftward shift in the supply curve? [7]
- Increased costs of production
- Lack of technology
- Increased taxes
- Decreased subsidies
- Worsened weather
- Prices of complimentary goods decreasing
- Number of firms in the industry decreasing
What would an increase in demand and supply result in?
- Increase in quantity
- Similar price
What would a decrease in demand and supply result in?
- Decrease in quantity
- Similar price
What would an increase in demand and decrease in supply result in?
- Similar quantity
- Increase in price
What would a decrease in demand and an increase in supply result in?
- Similar quanity
- Decrease in price
How do you demonstrate revenue on a demand and supply diagram?
By drawing a rectangle with the height of it being price and its width being quantity-the area is revenue
What is the formula for price elasticity of demand?
%change in quantity demanded/%change in price
How do you calculate percentage change?
((New data-Old data) / Old data) x 100
What factors increase the price elasticity of demand?
- If it has many substitutes (undifferentiated)
- If it accounts for a small percentage of an individual’s income
- If it is a luxury
What factors decrease the price elasticity of demand?
- If it hasn’t got many substitutes
- If it accounts for a large percentage of an individual’s income
- If it is a necessity
- If it is habit-forming/addictive
What does an inelastic demand/supply curve look like?
Steep
What does an elastic demand/supply curve look like?
Flat
What should producers do if the demand of a good is inelastic?
Raise prices
What should producers do if the demand of a good is elastic?
Lower prices
What is the formula for price elasticicy of supply?
%change in quantitied supplied/%change in price
What is unitary demand/supply?
Where the demand or supply of a product is neither elastic nor inelastic (has a price elasticity of -1 or 1)
What factors increase the price elasticity of supply?
- A large supply of stocks
- Lots of spare production capacity
- If it is easy to switch between alternate methods of production
What factors decrease the price elasticity of supply?
- Limited supply of stocks
- Lack of spare production capacity
- Unease of switching to alternate methods of production
