Demand & Supply Flashcards
What is the market?
A set of arrangements that allows buyers and sellers to communicate and exchange goods and services
Give an example of why markets can fail
e.g. lack of competition in market = buyers may higher prices & have less choice
Name 2 Functions of a Market System
- Price Determination
- Resource Allocation
Explain how a market helps allocate a nation’s resources
Resources flow from declining markets where prices are falling into thriving markets where prices are rising
What is demand?
Willingness and ability of consumers to buy goods and services
What is the Law of Demand?
As the price increases, the quantity demanded decreases and vice versa
What is quantity demand?
Amount of a product that people are willing and able to purchase at one, specific price
Name 5 determinants of demand (factors that affect demand)
- Income
- Price of Other Goods
- Tastes
- Expectations
- Population
Describe how population affects demand
If population increases as there is more people to buy the product, demand for that product will increase
Describe how income affects the demand for normal goods
Increase in income = increase demand for normal goods
Describe how income affects the demand for inferior goods
Increase in income = decrease demand for inferior goods
What are substitute goods?
Goods that are alternatives to each other
Describe how substitute goods affect demand
An increase in the price of one good will decrease the demand for it and increase the demand for its substitutes
What are complementary goods?
Goods that are purchased together because they are used together
Describe how complementary goods affect demand
When the price of complementary goods decreases, the demand increases for the good whose price has not changed
Describe how expectations affect demand
If you expect prices to fall in the future, you may out off purchases today
Explain how tastes affect demand
A change in taste will change demand
e.g. If a good becomes really popular, the demand for that good will increase
Why does the demand curve slopes DOWNWARDS?
Inverse relationship between price and quantity demanded
What will a change in price cause on a demand curve?
A change in price causes a MOVEMENT along the demand curve
Illustrate a change in price cause on a demand curve
What causes a shift in demand?
Caused by any factor OTHER THAN price
Illustrate the effect of the quantity demanded increasing (on a demand curve)
What is supply?
Willingness and ability of producers to sell goods and services
What is the law of supply?
As price increases, the quantity supplied increases and vice versa
Name 4 factors that affect supply
- Cost of Production
- Availability of Resources
- Advancements in Technology
- Number of Suppliers
- Indirect Taxes
- Subsides
- The Prices of Other Goods
Describe how the cost of production affects supply
Increase in cost of production (e.g. Raw materials, wages) = decrease producers’ profits (supply curve to shift to the left)
Describe how the availability of resources affects supply
Availability of resources increase = can create more products (= supply curve will shift to the right)
Describe how advancements in technology affects supply
Advancements (or improvements) in technology will increase supply as they reduce the cost of production
Describe how the number of suppliers affects supply
Increase in number of suppliers in a market = increase supply to the market (= supply curve shifts to the right)
Describe how subsides affect supply
If producer receives a subsidy = supply will increase because costs are reduced
Describe how indirect taxes affect supply
When they imposed/increases = supply will fall because indirect taxes represent a cost to firms
Describe how the prices of other goods affect supply
Firms may switch production to workable alternatives if its price starts to rise = supply of alternative product will increase while supply of existing product will fall
Why does the supply curve slopes UPWARDS?
Direct relationship between price and quantity
Illustrate a change in price on a supply curve
Illustrate a shift in supply on a supply curve
What is market equilibrium?
Where quantity demanded EQUALS quantity supplied
What is equilibrium price?
Price of a good or service when supply is equal to demand
What is equilibrium quantity?
Quantity demanded and supplied at the equilibrium price
What is excess demand?
When price DECREASES and consumers demand more and producers supply less
aka shortage
Illustrate excess demand
What is excess supply?
When price INCREASES and producers supply more and consumers demand less
aka surplus
Illustrate excess supply
What is price elasticity of demand?
The responsiveness of demand to a change in price
How do you calculate PED?
Percentage Change in Price
If PED is more than 1, it’s…
Elastic
If PED is less than 1, it’s…
Inelastic
If PED is exactly 1, it’s…
Unit Elastic
If PED is exactly 0, it’s…
Perfectly Inelastic
PED: Illustrate Unit Elastic
Can be a straight line
PED: Illustrate Perfectly Inelastic
PED: Illustrate inelastic demand
PED: Illustrate elastic demand
What is meant if the demand for product is price elastic?
Change in demand will be greater than change in price
What is meant if the demand for product is price inelastic?
Change in price will be greater than change in demand
PED: Name 4 factors of price elastic goods
- Many close substitutes
- Non-essential good
- Product widely available
- Large proportion of income
PED: Name 4 factors of price inelastic goods
- Habit forming
- Essential good
- Few substitutes
- Small proportion of income
What is price elasticity of supply?
Responsiveness of supply to a change in price
How do you calculate PES?
Percentage Change in Price
Name 4 factors that determine PES
- Time (Production Speed)
- Spare Capacity
- Availability of Factors
- Stocks
Describe how time (production speed) affects PES
If a company has little time to increase supply = the supply will be INELASTIC
Describe how spare capacity affects PES
If a company is not using all their resources = supply can increase quickly (ELASTIC)
Describe how the availability of factors affects PES
If a firm can easily access the factors of production = changes in supply will be ELASTIC
Describe how stocks affects PES
If a company has spare stocks = supply can increase quickly (ELASTIC)
PES: Illustrate price inelastic
PES: Illustrate price elastic
What is income elasticity of demand (YED)?
Responsiveness of demand to a change in INCOME
Describe how to calculate YED
Percentage Change in Income
Describe how normal goods affects YED
As income increases, demand for these goods increase
Describe how inferior goods affects YED
As income increases, demand for these goods decreases
Normal goods = _______ YED
POSITIVE
Inferior goods = ______ YED
NEGATIVE
Interpreting YED: What happens if it’s greater than 1?
- Elastic
- Normal Good
Interpreting YED: What happens if it’s less than -1?
Interpreting YED: What happens if it’s between 0 and 1?
- Inelastic
- Normal good
Interpreting YED: What happens if it’s between -1 and 0?
- Inelastic
- Inferior good
Interpreting YED: 0 Decimal (e.g 0.65) = ____
Inelastic
What is total revenue?
Total income earned by the business
How do you calculate total revenue?
TR = Price × Quantity Demanded
What happens to price & TR if a good is elastic?
Price Increases, TR decreases
Price decreases, TR increases
{Opposites - Price & TR}
What happens to price & TR if a good is inelastic?
Price increases, TR increases
Price decreases, TR decreases
{Same - Price and TR}
How does the government use price elasticity?
- They impose indirect taxes on goods with are price inelastic
- Because consumers cannot easily avoid buying them
What is specialisation?
Producing one product in great detail
What is occupational specialisation?
When an individual is specialised in one specific job
What is factor substitution?
When technology takes over the job of a human workforce
Name 3 advantages of occupational specialisation
- More experienced and qualified
- Job will be done efficiently
- Higher salary
Name 3 disadvantages of occupational specialisation
- Job may become repetitive or boring
- Job rotation is restricted
- Responsibility is on one worker
