Demand and Supply Flashcards
What is the law of demand?
As the price of a good decreases, the quantity demanded increases, and vice versa.
What is the law of supply?
As the price of a good increases, the quantity supplied increases, and vice versa.
What does ‘equilibrium’ mean in the context of supply and demand?
Equilibrium is the point where the quantity demanded equals the quantity supplied.
What is a demand curve?
A graphical representation of the relationship between the price of a good and the quantity demanded.
What is a supply curve?
A graphical representation of the relationship between the price of a good and the quantity supplied.
Define ‘elasticity of demand’.
Elasticity of demand measures how much the quantity demanded of a good responds to a change in price.
What is the formula for calculating price elasticity of demand?
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
What does it mean if demand is elastic?
Demand is elastic if the price elasticity of demand is greater than 1, indicating a significant change in quantity demanded with price changes.
What does it mean if demand is inelastic?
Demand is inelastic if the price elasticity of demand is less than 1, indicating a small change in quantity demanded with price changes.
What is unitary elasticity?
Demand has unitary elasticity when the price elasticity of demand is equal to 1, meaning the percentage change in quantity demanded is equal to the percentage change in price.
What factors affect the price elasticity of demand?
Factors include the availability of substitutes, necessity vs luxury, proportion of income spent, and time period.
What is cross-price elasticity of demand?
Cross-price elasticity measures how the quantity demanded of one good changes in response to a change in the price of another good.
What is the formula for calculating cross-price elasticity of demand?
Cross-Price Elasticity = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)
What is income elasticity of demand?
Income elasticity of demand measures how the quantity demanded of a good changes in response to a change in consumer income.
What is the formula for calculating income elasticity of demand?
Income Elasticity = (% Change in Quantity Demanded) / (% Change in Income)
What does it mean if a good is a normal good?
A normal good is one for which demand increases as consumer income increases.
What does it mean if a good is an inferior good?
An inferior good is one for which demand decreases as consumer income increases.
What is the concept of supply elasticity?
Supply elasticity measures how much the quantity supplied of a good responds to a change in its price.
What is the formula for calculating price elasticity of supply?
Price Elasticity of Supply = (% Change in Quantity Supplied) / (% Change in Price)
What factors affect the price elasticity of supply?
Factors include the time period, availability of inputs, and the flexibility of production.
What is perfectly inelastic demand?
Perfectly inelastic demand occurs when the quantity demanded does not change regardless of price changes.
What is perfectly elastic demand?
Perfectly elastic demand occurs when any increase in price causes the quantity demanded to drop to zero.
What is a shift in demand?
A shift in demand occurs when the quantity demanded changes at every price level, often due to factors like consumer preferences or income changes.
What is a shift in supply?
A shift in supply occurs when the quantity supplied changes at every price level, often due to changes in production costs or technology.
What is the difference between a movement along the demand curve and a shift of the demand curve?
A movement along the demand curve is caused by a change in price, while a shift of the demand curve is caused by a change in other factors affecting demand.
What is the effect of a price ceiling?
A price ceiling is a maximum price set by the government, leading to potential shortages if set below equilibrium.
What is the effect of a price floor?
A price floor is a minimum price set by the government, leading to potential surpluses if set above equilibrium.
What is consumer surplus?
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
What is producer surplus?
Producer surplus is the difference between what producers are willing to accept and what they actually receive.
What does it mean for a market to be in disequilibrium?
Disequilibrium occurs when the quantity demanded does not equal the quantity supplied, leading to shortages or surpluses.
What is the relationship between demand and total revenue for elastic demand?
For elastic demand, an increase in price leads to a decrease in total revenue.
What is the relationship between demand and total revenue for inelastic demand?
For inelastic demand, an increase in price leads to an increase in total revenue.
What is the relationship between demand and total revenue for unitary elasticity?
For unitary elasticity, changes in price do not affect total revenue.
What is a Giffen good?
A Giffen good is a type of inferior good for which demand increases as the price increases, contrary to the law of demand.
What is a Veblen good?
A Veblen good is a type of luxury good for which demand increases as the price increases, as higher prices may make the good more desirable.
What does ‘marginal utility’ refer to?
Marginal utility refers to the additional satisfaction or benefit received from consuming one more unit of a good.
How does the concept of diminishing marginal utility affect demand?
As more units of a good are consumed, the additional satisfaction gained from each additional unit typically decreases, affecting demand.
What is the difference between short-run and long-run supply?
In the short run, some factors are fixed, while in the long run, all factors can be varied, allowing for more flexibility in supply.
What is an example of a non-price determinant of demand?
Examples include consumer preferences, income levels, and prices of related goods.
What is an example of a non-price determinant of supply?
Examples include production costs, technology, and number of sellers.
What is the concept of ‘market equilibrium price’?
Market equilibrium price is the price at which the quantity demanded equals the quantity supplied.
What is the primary purpose of the demand and supply model?
The primary purpose is to determine the price and quantity of goods in a competitive market.
What role do expectations play in demand and supply?
Expectations about future prices can influence current demand and supply decisions.
What is the impact of a subsidy on supply?
A subsidy lowers production costs, typically increasing supply and shifting the supply curve to the right.
What is the impact of a tax on supply?
A tax raises production costs, typically decreasing supply and shifting the supply curve to the left.
What is the concept of ‘derived demand’?
Derived demand refers to the demand for a good or service that arises from the demand for another good or service.
What is the difference between a substitute and a complement?
Substitutes are goods that can replace each other, while complements are goods that are consumed together.
How does an increase in the price of a substitute affect demand?
An increase in the price of a substitute typically increases the demand for the original good.
How does an increase in the price of a complement affect demand?
An increase in the price of a complement typically decreases the demand for the original good.
What is a market failure?
Market failure occurs when the allocation of goods and services is not efficient, often due to externalities or public goods.
What is the role of government in correcting market failures?
The government can intervene through regulations, taxes, subsidies, or the provision of public goods.
What is an externality?
An externality is a side effect or consequence of an economic activity that affects other parties without being reflected in costs.
What is a public good?
A public good is a good that is non-excludable and non-rivalrous, meaning it is available for everyone to use.
What is the significance of consumer and producer surplus in welfare economics?
Consumer and producer surplus measure the benefits to consumers and producers from participating in the market, reflecting economic efficiency.
What is the concept of ‘price discrimination’?
Price discrimination occurs when a seller charges different prices to different consumers for the same good, based on willingness to pay.
What is the significance of elasticity in business decision-making?
Understanding elasticity helps businesses set prices and forecast changes in demand based on market conditions.
