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Economics > Demand and Supply, and Elasticity > Flashcards

Demand and Supply, and Elasticity Flashcards

1
Q

What does the law of supply states?

A

When the price of a product rises, its supply will rise. When the price of a product falls, its supply will fall.

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2
Q

What is the individual supply?

A

Individual supply refers to the quantity of goods or services supplied by single firm/supplier at a specific price at any point in time.

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3
Q

What is the market supply?

A

Market supply refers to the aggregate quantity of goods or services supplied by sellers at a specific price at any point in time.

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4
Q

What would an external change that increases the quantity of goods/services that sellers are willing to produce at a given price look like in the graph?

A

It will shifts the supply curve to the right.

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5
Q

What would an external change that decreases the quantity of goods/services that sellers are willing to produce at a given price look like in the graph?

A

It will shifts the supply curve to the left.

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6
Q

What can cause a shift in the supply curve?

A 
Cost of production;
Profitability of alternative products;
Profitability of goods in joint supply;
Changes in the number of suppliers;
Natural or social factors;
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7
Q

What can affect cost of production?

A

Change in government policy;
Change in technology;
Change in organization;
Change in input prices (raw materials etc)

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8
Q

What is equilibrium market?

A

The equilibrium market is where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied) for a specific price. No surplus and no deficit.

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9
Q

What can cause a change in market equilibrium?

A

Change in demand (i.e. change in the position of demand curve)
Change in supply (i.e. change in the position of supply curve)
Change in both demand and supply (i.e. change in the positions of both demand and supply curves).

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10
Q

What is a price floor?

A

It is a way for government to control the price by imposing a min. price for a product, price cannot go below that number/minimum (high) price.

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11
Q

What is a price ceiling?

A

It is a way for government to control the price by imposing a max. price for a product price cannot go higher that number/maximum (low) price.

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12
Q

What is a movement along demand and supply curve called?

A

A change in quantity demanded or quantity supplied respectively.

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13
Q

What is a shift along demand and supply curve called?

A

A change in demand or supply respectively.

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14
Q

What is elastacity?

A

It’ s the measurement of how much buyers and sellers

respond to changes in the market conditions (quantitative response).

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15
Q

What is the price elasticity of demand?

A

It is a measure of the responsiveness of quantity demanded to a change in price of the good/service.

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16
Q

How do number and closeness of substitutes influence price elasticity of demand?

A

The more substitutes there are, and the closer they are, the more is the likelihood of switching to alternatives when the prices of goods rise (more elastic demand for the product).

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17
Q

How does the proportion of income spent on the good/service influences price elasticity of demand?

A

If the proportion of income spent on a good/service isn high due to price rise, ther consumer will be forced to cut consumption (more elastic demand for the product).

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18
Q

How does the time period after a price change influences price elasticity of demand?

A

The longer the time period after a price change, the more elastic the demand is likely to be (Short term – less substitutes=relatively inelastic. Long term – more alternatives=more elastic)

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19
Q

How do the degree of Needs and Wants influence price elasticity of demand?

A 
For necessities (needs) the demand is less responsive to price changes (relative inelastic demand).
For luxiries (wants) the demannd is more responsive to price changes (relatively elastic demand).
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20
Q

How is the price elasticity of demand estimated?

A

% of quantity demand change divided by % of price change.

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21
Q

How is the cahnge in quantity demanded estimated?

A

New value minus old value divided by old value the result is moltiplied by 100.

22
Q

How is the price change estimated?

A

New value minus old value divided by old value the result is moltiplied by 100.

23
Q

What does it mean when the price elasticity of demand is >1?

A

It means that the demand is elastic, change in price cause a significant change in demand (the curve is flat).

24
Q

What does it mean when the price elasticity of demand is <1?

A

It means that the demand is inelastic, change in price does not cause a significant change in demand (the curve is steep).

25
Q

What does it mean when the price elasticity of demand is =1?

A

It means that the demand is unit elastic, price and quantity demanded change by the same proportion.

26
Q

What does it mean when the price elasticity of demand is =0?

A

It means that the demand is perfectly inelastic. Quantity demanded remains the same regardless of a change in price. If demand is perfectly inelastic, then demand will be vertical.

27
Q

What does it mean when the price elasticity of demand is =infinite?

A

It means that demand is perfectly elastic, at a certain price demand is infinite (A good with a very high elasticity of demand). In other words, if a firm increased the price by 1%, it would see all its demand evaporate. If demand is perfectly elastic, then demand will be horizontal.

28
Q

What is the Total revenue?

A

Total revenue = Price multiplied by Quantity sold

29
Q

What is the Total Expenditure

A

Total Expenditure = Price multiplied by Quantity bought

30
Q

What is the correlation between Price elasticity of demand and total expenditure/total revenue?

A

If the price elasticity of demand is inelastic, changes in price and total expenditure/total revenue move in the same direction.
If the price elasticity of demand is elastic, changes in price and total expenditure/total revenue move in the opposite direction.

31
Q

What is the income elasticity of Demand?

A

The responsiveness of quantity demanded to a change in consumer incomes. % change in quantity demanded divided by % change in income.

32
Q

What is the income elasticity of demand for a normal good?

A

Income Elasticity of Demand for Normal goods is positive; as incomes rise, more goods are demanded at each price level.

33
Q

What is the income elasticity of demand for inferior good?

A

Income elasticity of demand for inferior good is negative; as consumers’ income rises, they buy fewer inferior goods.

34
Q

What does high income elasticity of demand means?

A

The quantity demand is highly dependent on the income (luxury goods). A rise in income comes with bigger increases in the quantity demanded.

35
Q

What does low income elasticity of demand means?

A

Income does not make as much difference in the uantity demanded (necessities). A jump in income is less than proportionate to the increase in the quantity demanded.

36
Q

What is the difference between demand and quantity demanded?

A

Demand simply denotes the willingness and a person’s ability to purchase (the all curve). Quantity demanded represents the amount of an economic good or service desired by consumers at a fixed price (point on a single demand curve which corresponds to a specific price).

37
Q

What is the cross-price elasticity of Demand?

A

The responsiveness of quantity demanded to a change in price of other commodities.

38
Q

How is the cross-price elasticity of Demans estimated?

A

% change in quantity demanded divided by % change in price of related good.

39
Q

How is the cross-price elasticity of Demans for substitutes?

A

Substitutes have a positive cross-price elasticity: as the price of one good increases, the demand for the other good increases.

40
Q

How is the cross-price elasticity of Demans for complements?

A

Complementary goods have a negative cross- price elasticity: as the price of one good increases, the demand for the second good decreases.

41
Q

What is the price elasticity of supply?

A

The price elasticity of supply is a measure of the

responsiveness of quantity supplied to a change in price of the good/service.

42
Q

How is price elasticity of supply estimated?

A

% change in quantity supplied divided by % change in price.

43
Q

How does cost influences the price elasticity of supply?

A

The less the additional (or marginal) cost of producing additional output, the more firms will be encouraged to produce for a given price rise: the more price elastic the supply.

44
Q

How does cost influences the price elasticity of supply in the immediate time period?

A

Supply is virtually fixed or can only vary depending on available stock. Firms are highly unlikely to increase supply by much immediately. Supply is highly to perfectly inelastic.

45
Q

How does cost influences the price elasticity of supply in the short run?

A

A slightly longer period of time will allow for increase in some inputs (e.g. raw materials) while other factor inputs remain fixed.

46
Q

How does cost influences the price elasticity of supply in the long run?

A

Supply is expected to be highly elastic in the long run as there will be sufficient time for all inputs to change/adjust and for new firms to enter the industry.

47
Q

What does it mean when Price elasticity of supply = 0?

A

The price elasticity of supply is perfectly inelastic. With more demand and increase in price, supply cannot increase (vertical line).

48
Q

What does it mean when Price elasticity of supply= infinity?

A

Perfect elasticity - when price elasticity of supply equal infinity, it means that any amount of a good will be supplied at the prevailing price, but nothing is supplied below this prevailing price (horizontal line).

49
Q

What does it mean when Price elasticity of supply >1?

A

Elastic supply – a change in price causes a bigger proportional change in supply.

50
Q

What does it mean when Price elasticity of supply <1?

A

Inelastic supply – a change in price causes a smaller proportional change in quantity supply.

51
Q

What does it mean when Price elasticity of supply =1?

A

It means that the demand is unit elastic, price and quantity supply change by the same proportion.

Economics (3 decks)

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