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Microeconomics Main > Demand, PED, YED, XED and interrelationships between markets > Flashcards

Demand, PED, YED, XED and interrelationships between markets Flashcards

1
Q

Define demand

A

The quantity of a good/service consumers are willing and able to buy at a given price in a given time period.

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2
Q

What is the ‘Law of Demand’?

A

There is an inverse relationship between price and quantity demanded. As price increases, Qd decreases and vice versa assuming ceteris paribus.

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3
Q

Why does demand have a downward slope?

A
  • Income effect

- Substitution Effect

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4
Q

A change in price causes a…

A

movement along the demand curve.

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5
Q

What cause changes in demand?

A 
PASIFIC:
Population
Advertising
Substitutes Prices
Income
Fashion/tastes
Interest rates
Complements price
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6
Q

What is PED?

A

Price Elasticity of Demand measures the responsiveness of quantity demanded given a change in price.

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7
Q

What is the equation for PED?

A

% change in Qd/ % change in P

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8
Q

How do you calculate percentage change?

A

Difference/original x 100 (New - initial/initial x 100)

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9
Q

PED is always…

A

negative - Law of Demand - price and quantity inversely related.

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10
Q

PED:

> 1 means…

A

Demand is price elastic.

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11
Q

PED:

< 1 means…

A

Demand is price inelastic.

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12
Q

PED:

0 means…

A

Demand is perfectly price inelastic.

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13
Q

PED:

Infinity means…

A

Demand is perfectly price elastic.

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14
Q

PED:

1 means…

A

Demand is unit price elastic.

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15
Q

PED:

Steep demand curve means…

A

demand is price inelastic.

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16
Q

PED:

Shallow demand curve means…

A

demand is price elastic.

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17
Q

PED:

Exactly vertical demand curve means…

A

demand is perfectly price inelastic.

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18
Q

PED:

Exactly horizontal demand curve means…

A

demand is perfectly price elastic.

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19
Q

How can it be determined whether demand for a good/service is price elastic or price inelastic?

A

SPLAT
Substitutes - the more substitutes = more price elastic
Percentage of income - the greater the % of income = more price elastic
Luxury/Necessity - Luxury = more price elastic, Necessity = price inelastic
Addictive/habit forming - Addictive = price inelastic, habit forming = inelastic
Time period = short run - Inelastic, long run - elastic as more substitutes become available

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20
Q

What does a change in price mean if a good/service is price inelastic?

A

A smaller percentage change in demand.

21
Q

What does a change in price mean if a good/service is price elastic?

A

A larger percentage change in demand.

22
Q

What happens if price increases and total revenue decreases?

A

Price increase will cause Qd to drop significantly - selling a lot less at a slightly higher price.

23
Q

What happens if price decreases and total revenue increases?

A

Price decrease will cause Qd to increase massively - selling much more at slightly reduced price.

24
Q

What happens if both price and total revenue increase?

A

Price increase will cause Qd to fall but only by a small amount - selling a little bit less but at a much higher price

25
Q

What happens if both price and total revenue decrease?

A

Price decrease will only cause Qd to increase by a small amount, selling only a bit more but at a much lower price.

26
Q

If the demand curve is price elastic, and price falls, will more revenue be gained or lost?

A

Gained.

27
Q

If the demand curve is price inelastic, and price rises, will more revenue be gained or lost?

A

Gained.

28
Q

Define YED

A

Income Elastic of Demand measures the responsiveness of quantity demanded given a change in income.

29
Q

What is the equation for YED?

A

% change in Qd/ % change in income

30
Q

Normal Goods are…

A

positive - YED > 0

31
Q

Inferior Goods are…

A

negative - YED < 0

32
Q

YED - normal good:

> 1 means…

A

demand is income elastic - NORMAL LUXURY - if income rises demand for the normal good will increase proportionally less than the increase in income.

33
Q

YED - normal good:

< 1 means…

A

demand is income inelastic - NORMAL NECESSITY - if income rises demand for this normal good will increase proportionally more than the increase in income.

34
Q

YED - inferior good:

> 1 means…

A

Demand is income elastic.

35
Q

YED - inferior good:

< 1 means…

A

Demand is income inelastic.

36
Q

Define XED.

A

Cross Elasticity of Demand measures the responsiveness of quantity demanded of a good/service given a change in price of another good/service.

37
Q

Substitutes are…

A

postive. (PSNC)

38
Q

Complements are…

A

negative. (PSNC)

39
Q

XED:

> 1 means…

A

demand between the goods/services is price elastic (strongly related) - when the prince of Good A changes, the Qd of Good will change but proportionally more than change in price of Good A.

40
Q

XED:

< 1 means…

A

demand between the goods/services is price inelastic (weakly related) - if the price of Good A changes, the Qd of Good B will change but proportionally less.

41
Q

XED:

0 means…

A

demand between the goods/services is perfectly inelastic (no relationship).

42
Q

Define joint demand.

A

Joint demand is when the demand for one product is directly and positively related to market demand for a related good or service. Two complements are said to be in joint demand and the cross price elasticity of demand is negative.

Complements - e.g printers & ink, coffee, razors & blades.

43
Q

Define composite demand.

A

Two goods require the same input to be produced.

44
Q

Define derived demand.

A

When the demand for one good/services comes from something else (input demand) - when demand for one increases, demand for input increases.

45
Q

Define competitive demand.

A

Demand for products have close substitutes.

46
Q

Luxury goods are…

A

positive - YED > 1

47
Q

What is the income effect?

A

How the price change affects consumer income. If price rises, it effectively cuts disposable income, and there will be lower demand for the good because of this fall in disposable income.

48
Q

What is the substitution effect?

A

An increase in the price of a good will encourage consumers to buy alternative goods. The substitution effect measures how much the higher price encourages consumers to buy different goods, assuming the same level of income.

49
Q

What is the relationship between PED and total revenue?

A

EOIS - Elastic only irritates skin

  • Elastic opposite
  • Inelastic same

Microeconomics Main (41 decks)

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