demand and supply and consumer choice Flashcards
what does the demand curve show?
Shows the relationship between price and quantity
demanded, holding ‘other things’ constant
what are substitutes?
goods in competitive demand and act as replacements for similar goods
what are complements?
If a price increase for good A reduces the
demand for good B then A&B are complements
What is derived demand?
A good that’s demanded in order to produce another good
What is composite demand?
A good demanded for two or more uses
What is the formula for PED?
% change in quantity demanded / % change in price
What are the determinants of PED?
Substitutes
Percentage of income
Luxury
Addictive
Time period
What is income elasticity of demand? (YED)
The responsiveness of demand to a change in income
What does a positive (+) and negative (-) mean when talking about income elasticity of demand?
positive (+): normal good
negative (-): inferior good
What is the cross elasticity of demand formula?
%change QD of good A/ %change P of good B
What is the income elasticity of demand formula?
% change in quantity demanded / % change in income
What is cross elasticity of demand? (XED)
the responsiveness of demand for one product to a change in the price of another product
What does a positive (+) and negative (-) mean when talking about cross elasticity of demand?
positive (+): substitute good
negative (-): complementary good
what is price elasticity of supply?
a measure of the responsiveness of the quantity supplied to a change in price
What are the determinants of PES?
Stocks
Spare capacity
Raw materials
Time supply
What is the PES formula?
% change in quantity supply / % change in price
What is an inelastic good?
it has an elasticity of 0-1
What is an elastic good?
it has an elasticity of 1+
What is a Normal good?
goods that consumers demand more of when their incomes rise
What happens if PED is 0?
it means it’s perfectly inelastic
What happens if PED is 1?
it means it’s unitary, quantity changes at the same rate as price
What is an inferior good?
goods that consumers demand less of when their incomes rise
what is an example of an inferior good?
low-quality clothing, boxed and canned food and no-name brands of staple products.
What is consumer surplus?
the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount they do pay
What is producer surplus?
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
What is a subsidy?
A government payment that supports a business or market
What is a free market economy?
prices determined by demand and supply as there’s little government involvement
What is market failure?
It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.
What is an externality?
a benefit or cost that affects a third party
What are demerit goods?
Over consumer over produced goods that aren’t good for you
What are merit goods?
goods that benefit you and are under consumed
Prices above the equilibrium price are associated with what?
excess supply
what does an increase in income lead to in terms of shifts?
it leads to a shift right on the demand curve
In a market economy excess supply leads to
a fall in price
The “law of demand” implies that what?
as prices Fall, quantity demanded increases
If tea is a substitute for coffee and fresh lemons are a complement for tea but not for coffee, then a fall in the price of coffee will
. Reduce the demand for tea and lemons
Which of the following could not cause a shift of a firm’s supply curve for
cars?
A change in the price of cars
As long as households have limited incomes and wealth what will happen?
all demand curves will intersect the price axis
If a buyer’s demand for chicken thighs decreases as her income increases, chicken thighs for her are a what good.
inferior
Demand curves are derived while holding constant what?
Income, tastes, and the prices of other goods.
During an economic downturn when consumer income falls, the demand for ice cream cones increases and the demand for chocolate cheesecake
decreases. This implies ice cream cones
Are an inferior good and chocolate cheesecake is a normal good
Suppose a recently developed medicine became available in the UK and the government set the price equal to the cost of production. This led to a shortage of the medicine and therefore the government regulated its distribution. Had the medicine been sold under a free-market system:
There is not enough information given to determine whether or not there would be a price change.
The market for strawberries is in equilibrium until an unusual amount of rain floods some of the fields. What would occur
Equilibrium prices increase and equilibrium quantity decreases
Suppose the market for ferry travel to the continent is initially in equilibrium, then ferry, train, and airplane employees go on strike. If there was a
settlement and a moderate increase in the wages of ferry employees while simultaneously the train and airplane employees remained on strike, what would most likely happen to equilibrium price and quantity for ferry travel?
The equilibrium price would rise, and the equilibrium quantity would
increase.
The price of mozzarella cheese increases. In the market for pizza you would expect that the
. Demand for pizza would decrease and the price of pizza would fall.
what is the demand equation?
Qd= a-bP
what is the supply equation?
Qs= c + dP
why is the supply curve upwards sloping?
as you produce more costs rise therefore price rises due to the profit motive of producers
What is equilibrium price?
when Qs = Qd
what is a controlled planned or command economy?
an economy where the market doesn’t really allocate resources and the government gets involved more which can lead to shortages in resources etc eg north korea, venezuela
what are mixed market economies?
resources are allocated via the market as well as government intervention as well eg UK, Germany
what are market economies?
highly rely on the market in order to allocate resources eg US, Singapore
what happens to the market in a crisis?
governments often remove the market eg for wages minimum wage, for energy theres a price cap etc
what is a price ceiling?
the max price good can be sold at
what is a price floor?
the minimum price goods can be sold at
what is an indifference curve?
its a downward sloping curve where at every point in the curve the individuals utility doesn’t differ eg dont care about 5 bananas and 7 apples or 7 bananas and 5 apples
what does above and below the indifference curve show?
below shows whats not prefered and above shows what is prefered and on the line is just satsified
what does it mean if the indifference curve is higher?
greater utility
what are preferences?
they are complete and transitive
what is meant by transitive
if they prefer A to B and B is preferred to C then A has to be preferred to C
how do you find the slope of the budget line?
the ratio of price of good 1 and good 2 so just price of good on x axis divided price of goods on y axis
utility maximisation is equal to what?
The ratio of the marginal utilities and the prices
if mu1/p1 is greater than mu2/p2 what should a consumer do?
buy more of good 1 as the you get more satisfaction per price
When deriving a utility function, do we make interpersonal comparisons of utility?
never
Tina and Tom buy the same amounts of apples and
bananas at a supermarket where apples are £3/kg and
bananas £4/kg. Do Tina and Tom have the same marginal
rate of substitution for apples and bananas?
Yes
At the utility maximizing point is Marginal utility is higher for more
expensive goods
yes
