Chapter 2: The Basics Of Supply And Demand Flashcards
One of the best ways to understand relevance of economics is by using
Demand and supply analysis
The demand and supply analysis is a tool that can be applied to a variety of problems such as
- understanding and predicting changes in world economic conditions
- evaluating impact of government price controls, minimum wages, price supports etc.
- determine how taxes, subsidies, tariffs, import quotas affect the market
What does the demand curve illustrate
It shows how much of a good consumers are willing to buy as the price per unit changes. It is the relationship between the quantitative demanded and the price. Customers buy more if the price is lower, it is an inverse relationship
What does the supply curve illustrate
It shows the quantity/relationship of a good that producers are willing to sell at a given price, holding constant any other factors (ceteris paribus)
Higher prices lead to
Higher output and production and lower demand
Other factors that affect supply besides prices are
- production costs
- future expected prices
- productivity
*Change in supply refers to ___, while change in the quantity supplied refers to ___
Change in the supply refers to shifts in the supply curve while change in the quantity supplied refers to movements along the supply curve
If consumers buy more when the price is low, what type of relationship is there between price and demand:
A) positive relationship
B) inverse relationship
C) negative relationship
B) inverse relationship
Other factors that affect demand besides prices are
- income
- taste
- prices of other goods
Change in demand refers to ___, while change in the quantity demanded refers to ___
Change in demand refers to shifts in the demand curve while change in the quantity demanded refers to movements along the demand curve due to price
What are substitute goods
Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other (positive relationship)
What are complimentary goods
Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other (negative relationship).
What is market mechanism
It is the tendency in a flea market for price to change until the market clears (reaches equilibrium). At this point there is neither access demand or supply
Differentiate between surplus and shortage
Surplus is a situation in which the quantity supplied exceeds the quantity demanded. (any price above equilibrium creates a surplus)
Shortage is a situation in which the quantity demanded exceeds the quantity supplied. (any price below equilibrium creates a shortage)
Changes in equilibrium occur based on what three scenarios/changes
- Only a shift in supply
- Only a shift in demand
- A simultaneous change in both supply and demand
Define elasticity
Elasticity measures the sensitivity of one variable to another. Generally elasticity depends on the availability of substitutes, when more substitutes are available the higher the elasticity of demand (sensitive).
- When Ep >1 demand is price elastic (sensitive)
- When Ep <1 demand is price inelastic (not sensitive)
What are the different types of elasticities
- Price elasticity of demand
- Income elasticity of demand
- Cross price elasticity of demand
- Price elasticity of supply
Explain price elasticity of demand
It is the percentage change in quantity that is demanded of a good, due to a 1% increase in its price. It will always be negative given the inverse relationship between price and quantity demanded.
The demand curve is illustrated by ___
A linear line expressed as Q=a-bP
What is an infinitely elastic demand
Consumers buy as much of a good as they can get a single price, but for any higher price the quantity demanded drop to 0, while for any lower price the quantity demanded increases without limit
What is a completely inelastic demand
Consumers will buy a fixed quantity of good regardless of its price
Explain income elasticity of demand
It is the percentage change in quantity that is demanded of a good, due to a 1% increase in income
Explain cross price elasticity of demand
It is the percentage change in quantity that is demanded of a good, due to a 1% increase in the price of another good (substitute or complimentary)
If Ec is positive (>0) = substitute and if Ec is negative (<0) = complements
Explain price elasticity of supply
It is the percentage change in quantity that is supplied of a good, due to a 1% increase in price (will always be positive, as high price induce higher supply)
Differentiate between point and arc elasticities
Point elasticity measures elasticity at a particular point. Arc elasticity is calculated over a range of prices.
*In demand elasticity what’s the difference between the short run and long run
Durable goods are much more price elastic (sensitive) in the short run as products have a longer lifespan. For example cars, fridges.
Non-durable goods are much more price elastic in the long run as lifespan of the products are short. For example coffee, petrol.
The difference between the short and the long run is largely dependent on durability
In the elasticity of supply what’s the difference between the short run and the long run
For most goods supply is more elastic in the long run. Due to firms capacity constraints they are unable to expand production significantly in the short run
Besides taxation and subsidies, government conducts ___
Market regulation. One of these interventions being price controls or minimum and maximum price fixing. (maximum price fixing creates access demand -shortage- and minimum price fixing creates excess supply -surplus-)
