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economics (micro) > demand and supply in product markets > Flashcards

demand and supply in product markets Flashcards

1
Q

define product market

A

refers to how a good is sold and determined the price and quantity sold

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2
Q

what should we assume about consumers and firms?

A

they are rational so they try to maximise their economic welfare and make decisions to do so

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3
Q

what do firms want to do with profits

A

maximise profits

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4
Q

what does an individual demand curve show?

A

the price people are willing and able to pay for a particular quantity of a good

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5
Q

what does the market demand curve show?

A

illustrated the price consumers in the whole economy are willing to pay for a particular quantity of a good

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6
Q

what causes a movement along the demand curve

A

a change in price

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7
Q

what is marginal utility

A

-the satisfaction you gain from the last unit of consumption

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8
Q

why is the demand curve downward sloping

A

as you consume more goods the utility usually declines

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9
Q

what is the income effect?

A

if the price of a food increases the. consumers have less disposable income therefore there is lower demand

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10
Q

what is the substitution effect?

A

looks at the effect of a price increase compared to alternatives

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11
Q

when do we get a shift in the demand curve?

A

when, even at the same price, consumers are willing to buy a higher quantity of goods

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12
Q

what causes a shift to the right in demand? (5)

A
  • an increase in disposable income
  • an increase in the quality of a good e.g. the latest iphone
  • advertising that increases brand loyalty
  • and increase in the price of substitutes
  • fall in the price of complements
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13
Q

what is a supply curve?

A

shows the quantity of a good a producer plans to sell in the market

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14
Q

when do we get a movement along the supply curve?

A

if price changes

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15
Q

why is the supply curve upward sloping?
(2)

A
  • as price increases firms have an incentive to supply more because a higher price means higher revenue
  • as output rises firms usually have higher marginal costs in the short run and it is more costly to increase output so they require higher prices
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16
Q

what causes a shift in supply?
(7)

A
  • decrease in costs of production
  • increase in number of producers
  • increase in the supply of complements
  • favourable climate conditions
  • improvements in tech
  • lower taxes on a good
  • government subsidy
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17
Q

what is joint supply

A

when 2 goods are supplied from the same source

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18
Q

what is the market equilibrium

A

when supply = demand and there’s no tendency for price to change

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19
Q

what is consumer surplus

A

the difference between the price that consumers pay and the price they are willing and able to pay

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20
Q

when does consumer surplus tend to be higher?

A

when markets are competitive and prices are low

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21
Q

what is producer surplus?

A

the difference between the price suppliers receive and the price they would’ve been willing to supply the good at

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22
Q
  1. how do we calculate a triangle?
  2. how do we calculate a trapezium
A
  1. 1/2 base X height

2.( a+b / 2 ) X height

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23
Q

what is elasticity of demand supply

A

measures the extent to which quantity responds to a change in variable which affects it such as price or income

24
Q

what are the 3 types of elasticity of demand?

A
  1. price elasticity of demand
  2. income elasticity of demand
  3. cross elasticity of demand
25
Q

what letters stand for price elasticity of demand?

A

PED

26
Q

what does it mean if PED is 1

A
  • PED is unit elastic
  • % change in demand is exactly the same as % change in price
27
Q

what does it mean if PED is >1

A
  • demand is elastic
  • demand responds more than proportionately to a change in price
28
Q

what does it mean if PED is 0

A
  • demand is perfectly inelastic
  • demand does not change at all when price changes (vertical line)
29
Q

what does it mean if PED is between 0 and 1

A
  • demand is inelastic
  • there is a less than proportionate change in demand to a change in price
30
Q

what factors effect PED?

A
  • substitutes
  • whether the good is a necessity or a luxury
  • whether the good is a habitual good
  • off peak and on peak times
  • definition of a product ( e.g mince or steak)
31
Q

what is the formula for PED?

A

% change in QD / % change in P

32
Q

what is income elasticity of demand

A

measures the relationship between a change in QD for a good and the change in real income

33
Q

what are the letters for income elasticity of demand?

A

YED

34
Q

what is the formula for YED?

A

% change in QD / % change in Y

35
Q

what type of elasticity of demand do normal goods have?

A
  • 0-1
  • positive elasticity of demand
36
Q

what type of elasticity of demand does luxury goods have?

A
  • > 1
  • demand rises more than proportionately to a change in income
37
Q

what type of elasticity of demand do inferior goods have?

A
  • negative income elasticity of demand
38
Q

what is cross elasticity of demand?

A

measures the responsiveness of QD to changes in the prices of other goods

39
Q

what is the formula for XED

A

% change in QD of good A / % change in price of good B

40
Q

what type of cross elasticity of demand do substitutes have?

A
  • positive
  • an increase in the price of one good will lead to an increase in demand for the other good
41
Q

what type of cross elasticity of demand do complementary goods have?

A

negative

42
Q

what type of cross elasticity of demand do unrelated products have?

A

zero cross elasticity

43
Q

what is price elasticity of supply?

A

measures the relationship between a change in quantity supplied to a change in price

44
Q

what is the formula for PES ?

A

% change in QS / % change in price

45
Q

what does it mean if price is elastic?

A

-the quantity supplied of a good is highly responsive to a change in price

  • producers can increase output without a rise in cost or time delay
46
Q

what does it mean if price is inelastic?

A
  • the quantity supplied of a good is not that responsive to a change in price
  • forms find it hard to change production in a given time period
47
Q

why is the value of PES positive?

A

an increase in price is likely to increase the QS total a market

48
Q

what factors affect elasticity of supply?
(4)

A

-spare production capacity

  • stocks of finished products and components
  • The ease and cost of factor substitution
  • time period and production speed
49
Q

What is a tax?

A
  • A fee imposed that increases the cost of a good and shifts the supply curve to the left
50
Q

who mainly has the tax burden if demand is price inelastic

A

consumer, meaning higher prices are charged

51
Q

who mainly has the tax burden if demand is price elastic?

A

mainly on the producer

52
Q

what is a subsidy?

A

money given to firms to encourage production and the consumption of a good

53
Q

which way does a subsidy shift the supply curve?

A

to the right reducing price and increasing output

54
Q

if a good is subsidised and demand is price inelastic who benefits the most?

A

consumer as there are lower prices

55
Q

if a good is subsidised and demand is elastic who benefits more?

A

producer

economics (micro) (2 decks)

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