Competitive Markets Flashcards
What is a market?
A market is anywhere buyers & sellers can exchange goods & services
What is demand?
The quantity of a good or service that consumers are willing and able to buy at a given price in a given period of time
What does the demand curve show?
The relationship between price and quantity demanded
What does a decrease in price cause, on a demand curve?
An extension in demand
What does an increase in price cause, on a demand curve?
A contraction in demand
When does a demand curve shift?
When there is a change in quantity demanded but not price
What could shift a demand curve?
Population
Advertisement
Price of substitutes
Income
Fashion & tastes
Interest rates
Complementary goods’ price
What are substitute goods?
Goods that are alternatives to each other, when one increases in price its demand will decrease, but demand for the other good will increase
What are complementary goods?
Goods that are often used together, if price increases for one then the demand for both will decrease, because people don’t want one without the other
What is derived demand?
The demand for a good or service that is needed to make another good or service. For example demand for fencing will increase demand for wood
What is composite demand?
When a good can be used for more than one thing. For example, an increase in demand for a product may leads to a decrease in supply for another product.
What is price elasticity of demand?
A measure of how quantity demanded for a good responds to a change price
What is the formula for PED?
% change in quantity demanded/ % change in price
If PED is between 0 and -1, how elastic is it?
It is inelastic
If PED is between -1 and -∞, how elastic is it?
It is elastic
What will PED always be less than?
0, it will always be negative
What shape is a perfectly elastic demand curve?
A straight horizontal line
What shape is a perfectly inelastic demand curve?
A straight vertical line
What is income elasticity of demand?
A measure of how much the demand of a good changes with a change in real income
What is the formula for income elasticity of demand?
% change in quantity demanded of a good/% change in real income
What is the YED of an inferior good when it is elastic?
YED is between -∞ and -1
What is the YED of an inferior good when it is inelastic?
YED is between -1 and 0
What is the YED of a necessity good?
YED is between 0 and 1
What is the YED of a luxury good?
YED is between 1 and ∞
What is cross elasticity of demand?
A measure of how the quantity demanded of a good responds to a change in price of another good
What is the formula for XED?
% change in quantity demanded of good A/ % change in price of good B
What does a positive XED between two goods show?
They are substitute goods
What does a negative XED between two goods show?
They are complementary goods
What is supply?
The quantity of a good or service that producers supply to a market at a given price, in a specific period of time
What does an increase in price show, on the supply curve?
An extension in supply
What does a decrease in price show, on a supply curve?
A contraction in supply
What are the causes of the supply curve shifiting?
Productivity
Indirect tax
Number of firms
Technology
Subsidy
Weather
Costs of production
What is joint supply?
When the production of one good or service involves the production of another good or service
What is price elasticity of supply?
A measure of how the quantity supplied of a good responds to a change in its price
What is the formula for PES?
% change in quantity supplied/% change in price
What is the value of PES always between?
0 and infinity, it is always positive
When is PES inelastic?
When it is between 0 and 1
When is PES elastic?
When it is between 1 and infinity
What is supply in the short run?
Price inelastic
What is supply in the long run?
It is more elastic
When is a market in equillibrium?
When supply equals demand
Where is consumer surplus on the supply & demand diagram
Above the equilibrium price line
Where is producer surplus on the supply & demand diagram?
Below the equilibrium price line
What is a subsidy?
Money paid by the government to the producer of a good/service to make it cheaper than it would be normally
