Booklet Two Flashcards
What is demand?
The quantity of a good or service that people are willing to buy at a given price in a given time period
What is effective demand?
The willingness and ability to buy a good or service
What is the law of demand?
Assuming ceteris paribus, if the price decrease of a good the quantity demanded will increase and vice versa
What is marginal utility?
The benefit gained from consuming one additional unit of a product or service
What is diminishing marginal utility?
As more units of a good is consumed the total utility decreases
How does a change in price affect the demand curve?
Price increases = contraction along the demand curve
Price decreases = extension along the demand curve
What are the factors that shift the demand curve?
SEPTIC
-Substitute good (price of substitute increase the demand will increase)
-Expectations of future prices (consumers expect price to be higher demand will increase
-Change in population (population increase demand will increase)
-Change in taste / consumer’s preferences (consumers taste shift away from product or service demand will decrease)
-Change in income
-Complimentary goods (complimentary goods become more affordable demand will increase)
If the demand curve shift to the right this means there is an
Increase in demand
If the demand curve shift to the left this means there is a
Decrease in demand
What is a market?
A market is a place where consumers and producers trade products for profit
What is an inferior good?
A good for which demand fall as income rises and vice versa
What is a luxury good?
A good for which demand rises as income rises and vice versa
What are the 4 types of demand?
Composite demand
Derived demand
Joint demand
Competitive demand
What is composite demand?
When goods or services has more than one use
What is competitive demand?
Occurs when there are alternative services or product consumers can choose from
What is joint demand?
Joint demand involves goods that are demanded together because they are either complements in consumption or used together in production
What is derived demand?
Refers to the demand for a factor of production or an input that is derived from the demand for the final product it helps produce
(For example the demand for labour in the automotive industry is derived from the demand of cars)
What is supply?
The quantity of a good or service that sellers are prepared to sell at a given price in a given time period
What is the law of supply?
Assuming ceteris paribus as the price of the good increases the quantity supplied will also increase and vice versa
A rightward shift in supply means that there is an
Increase in supply
A leftward shift in supply means that there is a
Decrease in supply
Factors that affect the supply curve
PECT
-Change in price / profitability of goods with competing supply
(and increase in price of Substitutes good will lead to an increase in supply and vice versa)
-Firms expectations of future prices (price increase supply will increase)
-Change in cost of production
(Cost of production increases supply will decrease)
-Change in the state of technology
(Improvement in tech will increase supply)
What is the double shift rule?
When two curves shift at the same time either price or quantity demanded will be indeterminate
(E.g price will always increase but quantity demanded will either increase, decrease or stay the same depending on the size of the shift)
What is consumer surplus?
The additional benefit enjoyed by consumers who pay less than they were willing and able to pay for a good
What is producer surplus?
The additional benefit enjoyed by producers who were able to sell for a price higher than they would have been willing to sell for
What is the alternative name for equilibrium price?
Market clearing price
What does the price elasticity of demand measure?
Measures the responsiveness of quantity demanded to a change in price
Formula for PED
% change in quantity demanded / % change in price
Interpretate PED
> 1 = price elastic
<1 = price inelastic
= 0 = perfectly price inelastic
= 1 = unitarily elastic
∞ = perfectly price elastic
Definition of price elastic
Quantity demanded changes more than proportionately to a change in price
What is the definition for price inelastic?
Quantity demanded changes less than proportionately to a change in price
Factors that affect PED - demand is price elastic
Luxury
Higher income
Long term price change
Availability of substitutes
Factors that affect PED - demand is price inelastic
Habit and addiction
Necessity
Low income
Brand loyalty
Short term price change
What does income elasticity of demand (YED) measure?
Measures the responsiveness of quantity demanded to a change in income
Formula for YED
% change in quantity demanded / % change in income
Interpretate YED
negative = inferior good
Between 1 - 0 = Normal good
Above +1 = luxury good
>1 =income elastic (luxury)
<1 = income inelastic (necessity).
What does cross price elasticity of demand (XED/CED) measure?
Measure the responsiveness of the quantity demanded of one good to a change in price of another good
Formula For CED/XED
% change in quantity demanded for good x / % change in price of good y
Interpretate XED/CED
negative = complementary good
positive = substitute goods
>1 = strong price elastic
<1 = weak price inelastic
What does the price elasticity of supply measure (PES)?
Measure the responsiveness of quantity supplied to a change in price
Formula for PES
% change in quantity supplied / % change in price
Interpretate PES
> 1 = price elastic
<1 = price inelastic
= 0 = perfectly price inelastic
= 1 = unitarily elastic
∞ = perfectly price elastic
Factors that affect PES (4)
Time lags in the supply chain
Availability of spare capacity
The expected duration of the price change
The ease with which production can be switched
