Chapters 7 - 12 chug Flashcards
Demand
Willingness and ability to buy a product
Demand’s relation to price
As price increases demand decreases
Individual demand
Amount that a consumer is willing to buy at different prices
Market demand
Total demand for product at different prices
Aggregation
Totaling up of demand
Demand schedule
Displays different quantities demanded at different prices
Demand curve
Diagram displaying the change in quantity demanded over a change in price
Movements along a curve
Extension: quantity increases
Contraction: quantity decreases
Factors that cause a shift in demand
Change in income
Change in price of related products
Advertising campaigns
Population (age composition, size)
Trends
Normal good
A product that’s demand increases when income increase
Inferior good
A product that’s demand decreases when income increase
Substitute
A product that can replace another
Supply
Willingness and ability to buy a product
Supply’s relation to price
As price increases demand increases
Individual supply
Supply of one firm
Market supply
Total supply for a product in an industry
Supply schedule
Displays different quantities supplied at different prices
Supply curve
Diagram displaying the change in quantity supplied over a change in price
Factors that cause a shift in supply
Costs of production
Technology
Taxes
Subsidies
Natural factors (Weather, health, livestock)
Prices of other products
Disasters and war
Discoveries and depletion of commodities
Equilibrium price
Price where demand and supply are equal
Disequilibrium
A state where demand and supply are not equal
Surplus
Supply is greater than demand
Shortage
Demand is greater than supply
Cause of shift in a D&S diagram
Movement in the other market force and a change in price
PED
Percentage change in demand over Percentage change in price
(How responsive demand is to a change in price)
Calculating PED
((Change in demand/original quantity demanded) *100) / ((Change in price/original price) *100)
Elastic
Quantity changes by a greater proportion when there is a change in price
Inelastic
Quantity changes by a smaller proportion when there is a change in price
Factors for elasticity of demand
Availability of substitutes
Loyalty
Addictiveness
Necessity
Proportion of income taken
Ease of switching
Time
Perfectly elastic demand
When a change in price causes a complete change in quantity demanded
Perfectly inelastic demand
When quantity demanded does not change due to a change in price
Unit elasticity of demand
When a percentage change in price results in an equal percentage change in quantity demanded giving a PED of 1
Increase in price when inelastic
Increased revenue
Increase in price when elastic
Loss revenue
Changes in PED
PED becomes more elastic as price increases
A shift to the right causes more inelastic curve vice versa
PES
Percentage change in quantity supplied over a percentage change in price
Calculating PES
((Change in supplied/original quantity supplied) *100) / ((Change in price/original price) *100)
Factors of elasticity in supply
Time to produce
Cost of altering its supply
Storage capability
Perfectly inelastic supply
When quantity supplied does not change to a change in price
Perfectly elastic supply
A change in price causes an infinite change in supply
Unit PES
When the percentage change in price is equal to the change in supply
Changes in PES
Over time becomes more elastic
Advances in technology makes product more elastic
Implications of PED and PES
Consumers benefit form elastic PED (Producers won’t drop prices due to lost revenue) and elastic PES (No large increase in price after demand increases)
Producers benefit from inelastic PED (higher prices and profit) and elastic PES (higher profits)
Governments want elastic PED (can discourage demerit goods by raising price of them ) and elastic PES (can subsidies the production of merit goods)
