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business Flashcards

definitions of key terms (in 1.2)

1
Q

What is the relationship between price and quantity demanded?

A

The demand curve is downward sloping and when price is high, less quantity is demanded.

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2
Q

Willingness to pay is?

A

The desire to pay based on tastes and preferences

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3
Q

Ability to pay is?

A

While factoring in a persons income, deducing whether they have the financial means to buy that product

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4
Q

What is the substitution effect?

A

when the price of one good falls, consumers will buy more of the cheaper good or service and less of the more costly good or service. So demand for the cheaper good will increase; demand for the costlier good decreases.

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5
Q

What is the income effect?

A

When prices fall, consumers can afford a greater quantity of goods and services (assuming income is fixed). So quantity demanded for these goods and services increases.

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6
Q

What is the relationship of substitute goods?

A

An increase in the price of one good will increase the quantity demanded of the other

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7
Q

What is the relationship of complementary goods?

A

An increase in price of one good will decrease the quantity demanded of the other

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7
Q

Why would demand shift to the right?

A

The demand curve will shift right if there is an increase in demand at that price point. E.g. if a product were to suddenly get more popular the curve would shift right.

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8
Q

Why would demand shift to the left?

A

The demand curve will shift left if there is a decrease in demand at that price point. E.g. if a product were to suddenly get less popular the curve would shift left.

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9
Q

For a normal good, what happens when income rises?

A

When income rises the quantity demanded will also rise. E.g. New cars

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10
Q

For an inferior good, what happens when income rises?

A

When income rises the quantity demanded may fall. E.g. rice (if more expensive products can be afforded)

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11
Q

Changes in prices cause a move along the curve, what happens when there is a rise in price?

A

demand contraction

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12
Q

Changes in prices cause a move along the curve, what happens when there is a fall in price?

A

demand extension

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13
Q

What are 2 causes of supply curve shifts?

A

A discovery of a new technology (allowing for the company to increase the rate of productivity)

Changes in Gov policies E.g. taxes, regulations and subsidies.

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14
Q

What is the effect of tax on supply?

A

Taxes are treated as costs by a business. Higher costs decrease supply. =taxes decrease supply

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15
Q

What is the “law of supply”?

A

A positive relationship in which a rise in price always almost will mean that firms increase the quantity supplied of that good/service. It is also called an extension in supply. The price encourages the firm.

16
Q

What are the 4 factors determining supply?

A

Tax, Technology, Productivity, Price

17
Q

What is equilibrium price

A

The only price where the amount consumers want to buy is equal to the amount producers want to sell

18
Q

What is disequilibrium?

A

When the market is not at a stable price and quantity. E.g. if petrol rises were to rise above their equilibrium levels the market would respond and quantity demanded would fall.

19
Q

What does excess supply and demand entail?

A

Happens at disequilibrium. The higher price makes it more profitable for petrol producers for e.g. , so output expands.

20
Q

What can excess demand lead to?

A

A price change. Producers raising the price in order to generate more profit.

21
Q

What is unstable when there is excess supply or demand?

A

The market price.

22
Q

What is perfectly elastic demand?

A

Horizontal demand line on graph. Any change in price will cause demand to drop to 0. PED= +/- infinity

23
Q

What is perfectly inelastic demand?

A

Vertical demand line on graph. Any price change will not effect demand. PED = 0. Demand curve looks like the “I” in inelastic

24
Q

What is unitary elasticity?

A

A given percentage change in price leads to an equal percentage change in quantity demanded or supplied.

25
Q

A good or service with a price elasticity of -1 is?

A

Unitary price elastic

26
Q

A good or service with a price elasticity between 0 and -1 is?

A

Price inelastic

27
Q

A good or service with a price elasticity of less than -1 (E.g. -2 or -3) is?

A

Price elastic

28
Q

An elastic good is one where..?

A

A change in price leads to a significant shift in demand and where substitutes are available for an item, the more elastic the good will be.

29
Q

What affects the elasticity of demand?

A

Percentage of income and time (people may be more sensitive to the price of a TV than a mars bar) Goods tend to be more price elastic in the long run because time can be devoted to searching for appropriate alternatives.
Availability of substitutes.
Type of good - addictive goods tend to be more price elastic

30
Q

What is an indirect tax?

A

An indirect tax is collected by one entity in the supply chain, such as a manufacturer or retailer, and paid to the government. However, the tax is passed onto the consumer by the manufacturer or retailer as part of the purchase price of a good or service. E.g. VAT

31
Q

Formula for Total revenue

A

Total revenue = price per unit x quantity

32
Q

Formula for YED

A

YED = percentage change in quantity demanded/percentage change in income.

33
Q

Formula for PED

A

PED = % change in quantity demanded/ % change in price

34
Q

YED coefficients

A

The larger the income elasticity of demand coefficient (number) the greater the responsiveness of quantity demanded to a change in income.
If the coefficient is positive, an increase in income will increase demand and a fall in income will decrease demand.
If the coefficient is negative, an increase in income will decrease demand and a fall in income will increase demand.

35
Q

Elasticity vs inelasticity

A

If the income elasticity of demand is less than 1 then this is described as inelastic. The minus shows that an increase in one variable will decrease the other variable.
If the income elasticity of demand is greater than 1 then this is described as elastic.

36
Q
A

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