Demand and Supply Flashcards
What is the fundamental economic problem
We have unlimited wants but only limited resources
Why are the factors of production
Land
Labour
Capital
Enterprise
Opportunity cost definition
The cost of the next best alternative foregone
What does a command economy involve (6)
All resources owned by government
No private sector
No incentives as failing at to succeed won’t be punished and there are no fruits of success
Equal distribution of goods/ service and income
Loss of freedom and choice
No unemployment
What does a pure market economy involve (6)
No government, resources are allocated to consumers and producers
No public sector
There is no safety net so failure is very bad and successful people prosper so there is incentive to work
Unequal distribution of incomes
Freedom and choice
Unemployment
Demand definition
Demand must be effective and supported by the money to purchase it
What is the law of demand
There is an inverse relationship between price and demand
if price rises, demand falls
What causes movement along the demand curve
Price
What causes the demand curve to shift, quantity to increase/ decrease (6)
Tastes and preferences Population Advertising Price of substitute products Price of complementary products Income
Supply definition
The quantities that producers are willing and able to offer for sale at different prices during a specified period of time.
What is the law of supply
There is a positive relationship between price and supply (if price rises, higher quantities will be supplied at lower prices)
What causes movement along the supply curve
Price
What causes the supply curve to shift
Number of producers Cost of production Efficiency of labour Costs of production increases/ decreases Tax
Equilibrium definition
The price mechanism brings together opposing factors of demand and supply snd creates an equilibrium. At this point demand equals supply and an equilibrium price and quantity sold are made
What is indirect tax and example
Tax imposed on producers
The producers can pass the burden to the consumers
E.g. VAT (value added tax)
Elasticity of demand definition
PED measures the responsiveness of demand to a change in price
What affects the elasticity of demand (5)
Close substitutes High % of income Necessity Brand loyalty (Addictive)
Equation for PED
% change in quantity demand
= ________________________________
% change in price
If the demand is inelastic what is the value of % change in price in relation to the % change in quantity demand
% change in QD is less than % change in P
If the demand is elastic what is the value of % change in price in relation to % change in quantity demand
% change in QD is more than % change in P
Why are cigarettes inelastic in demand
What is the change in price in relation to change in quantity
Why does the government intervene and what do they do (third parties?)
Addictive
No substitute products
Raise in price by 10% would result in a decrease in demand by less than 10%
Costs for treating and preventing smoking related issues are high so tax revenue covers costs (non smokers pay nothing)
What should firms do if their PED is inelastic
What should they not do
They should increase price as the % change of QD is less than % change in P so TR increases 😄
Should not reduce price as TR will decrease 😩
What should firms do if their PED is elastic
What should they not do
They should decrease price as the % change of QD is more than % change of P so TR increases 😄
Should not increase price as TR will decrease 😩
Why does Coca Cola have inelastic elements (2)
Why does Coca Cola have elastic elements (2)
Inelastic:
Lots of brand loyalty
Low percentage of income
Elastic:
Not a necessity
Not addictive
Substitute products
What is the elasticity of the good if the PED/ PES is greater than 1
Elastic
What is the elasticity of the good if the PED/ PES is between 0 to 1
Inelastic
What is the elasticity of the good if the PED is 0
Perfectly inelastic
What is the elasticity of the good if the PED is infinity
Perfectly elastic
Elasticity of supply definition
PES measures the responsiveness of of quantity supplied to a change in price
Equation for PES
% change in quantity supplied
= ________________________________
% change in price
Why will PES always be positive
If price rises, so will supply and vice versa
What is the elasticity of the good if the PES is 1
Unit elastic (change in price is an equal proportion to change in quantity supplied)
Wha determines supply elasticity (4)
Time frame
Spare production capacity available
Sticks available to meet changes in demand
Factor substitution possibilities
