Demand and supply in product markets Flashcards
What is a complement
Complementary goods are products which are used together.
What is consumer surplus
The difference between how much buyers are willing to pay for a good and what they actually pay.
What is cross elasticity
A measure of the responsiveness of quantity demanded of one good to a change in price of another good
What is a inferior good
When demand for a product falls as real income increases
What is a normal good
A good where demand increases when income increases
What is price elasticity of demand
A measure of the responsiveness of quantity demand to a change in price
What is price elasticity of supply
A measure of the responsiveness of quantity supplied to a change in price
What is producer surplus
The difference between the market price which firms receive and the price at which they are prepared to supply
What is a substitute
Substitutes are goods that perform the same function/satisfy the same need.
What is a luxury good
When demand increases more than income increases
What is a necessity
something needed for basic human existence, e.g. food, water, housing, electricity.
What is a product market
A product market is the marketplace where final goods or services are sold to businesses and the public sector.
Who are the economic agents
Consumer, Producer & Government
Objectives of consumer
Consumers aim to generate the greatest utility possible from an economic decision.
Objectives of producer
Producers aim to generate the highest profits, sales and revenue.
Objectives of government
Economic welfare
What is marginal utility
is the change in total utility or satisfaction derived from consuming an extra good or service.
How does derived marginal utility affect demand curve
If there are diminishing marginal returns, then peoples willingness to pay will decline, therefore fall in demand curve
Factors influencing demand
Price
Prices of substitutes and complements
Incomes
Fashion and trend
Structure of population
Advertising
Expectation of consumer
Factors influencing supply
Price consumers willing to pay
Technology
Seller expectations
Natural events
Cost of production
Why does the demand curve from top left to bottom right
Real Balance effect - As price level rises, the real value of peoples income falls so consumers are less able to buy the items they want or need.
Interest rate effect - If the price levels rises, this causes inflation and an increase in the demand for money and so a possible rise in interest rates with a deflationary effect on the economy.
When is there movement along the demand line
There is a movement along the demand curve when the quantity wanted of a single commodity changes due to a change in price, while all other factors remain constant
When does the demand curve shift
at each possible price due to a change in one or more other factors.
Where is consumer surplus on a diagram
Above producer surplus
Where is producer surplus on a diagram
Below consumer surplus
What is the equation for price elasticity of demand
PED = % change in Q.D. / % change in Price.
What is the equation for Income elasticity
YED = % change in Q.D / % change in Income.
How do you find the percentage change
Find out difference between numbers then you divide the original value by the change and times by 100
What is the equation for cross elasticity
XED = % change in Q.D good A / % change in price of good B
What is the equation for price elasticity of supply
PES = % change in Q.S. / % change in Price.
What happens when a good is elastic
when price increases/decreases, demand will fall/rise by more than the price increased/decreased
What happens when a good is inelastic
when the price goes down or up consumers’ buying habits also remain unchanged
How does the government use elasticity
When government taxes goods with inelastic demand, the change in quantity demanded will be smaller than if government taxed an elastic good (more efficient).
How does elasticity affect subsidys
If demand is elastic, then a subsidy causes a bigger percentage rise in demand. There is only a small fall in price, if inelastic then a subsidy causes a substantial fall in price, however there is only a small increase in demand.
What are substitute goods in cross elasticity of demand
Always positive because the demand for one good increase when the price for the substitute good increases.
What is weak substitutes
the two products have a positive but low cross elasticity of demand
What are complementary goods in cross elasticity of demand
Cross elasticity of demand for complementary goods is negative. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.
What does an inelastic supply line look like on a graph
The supply line would be steep
What does a perfectly inelastic supply line look like on a graph
A vertical line
What does an elastic supply line look like on a graph
The supply line would be more flat and the start will be raised higher
What does a perfectly elastic supply line look like on a graph
A horizontal line
What is marginal utility
The decrease or increase in satisfaction a consumer has from the consumption of each extra unit of a good or service.
How to find the real value when there is an inflation increase
Real value = (nominal value/price index) x 100
How do you find the mean
You find the mean by adding all the values together then dividing it by the amount of values.
How do you find the median
You find the median by creating a list of the values in order then seeing what the middle value is.
How do you calculate a change in the price index
Find the difference between the change then divide it by the original number, then you add or subtract the number by the base value
