Consumers in the market place Flashcards
What are price controls?
Price controls are government rules and laws setting price floors or price ceilings that forbid adjustment of prices
What is a price ceiling?
It is setting a maximum price by the government for sellers to sell.
It is below the market price
When does the government enforce a price ceiling?
When there is a shortage
What is a price floor?
It is setting a minimum price. This benefits suppliers
It is above the market price.
When does the government enforce a price floor?
When there is a surplus.
What is the price elasticity of demand?
It is the responsiveness of demand to changes in price.
It analyzes how much the quantity of demand will change in relation to prices
What is the formula used to calculate PED?
% change in quantity demanded /
% change in price
What is the formula used to calculate the % change in quantity demanded?
New QD- Old QD / Old QD x100
What is the formula used to calculate the % change in price
New price - Old price / Old price x100
What are the 5 types of Price elasticity of Demand?
Elastic (more than +1 or -1)
Inelastic (between o and 1 or -1)
Unitary = (1)
Perfectly Elastic = infinity
Perfectly Inelastic =0
Reasons why a product/service might have elastic or inelastic demand?
Whether close substitutes are available
Necessities and luxury
Share of income spent
Consumer taste
Normal goods, branded items etc
Inferior goods/ basic necessities
Define perfectly inelastic demand (PeD=0)
Demand does not change with the change in price
Define perfectly elastic demand (PeD=infinity)
Buyers are prepared to pay all they can obtain at a given price
Define unitary elastic demand (PeD=1)
Quantity demanded changes exactly as the change of the price
What is cross price elasticity of demand?
Measures the effects the change in price of one good has on the quantity demanded of another good
Substitutes: + positive
Complements: - negative
Independent: 0
