Economics 1 Flashcards
Demand
- Demand is the quantity of product or service that consumers are willing and able to purchase at a given price at a particular time
- Inverse relationship between the price and quantity demanded
How does price affect the demand for an item?
Inverse relationship
When the prices of an item increases- demand for it decreases.
What is a Demand Curve Shift?
When demand changes due to something other than price.
Positive shift → increase, move to Right
Negative shift → decrease, move to the Left
Reasons for a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price point when:
- Market size increases - When new consumers are available to purchase a product, such as when trade barriers between countries are removed, demand for the product will increase
- Price of substitutes go up - price of beef rises- so people buy more chicken
- Future price increase is expected - War in Middle East- people go out and buy gas
- Consumer income and wealth - For normal goods, the demand will increase if consumers have more wealth to spend on good
Reasons for a Negative Demand Curve Shift (Shift Left)?
Demand decreases at each price point when
- Price of complement goes up - price of beef goes up- less demand for ketchup
- Boycott - Company commits social blunder- consumers boycott
- Consumer income rises - Demand for inferior goods drops as people have more money to spend
Consumer tastes change to have an indeterminate relationship
How is Price Elasticity of Demand calculated?
ED= % Change in Quantity Demand / % Change in Price
OR
ED= (Change in Quantity Demand/Avg Quantity Demand) / (Change in Price/Avg Price)
Elasticity of Demand measures the sensitivity of demand to a change in price
What is Elastic Demand?
If coefficient of elasticity is greater than 1, demand is elastic
i.e. sensitive to price change
What is Unitary Demand?
Considered unitary if coefficient of elasticity = 1
Total revenue will remain the same if price is increased
What is Inelastic Demand?
Considered inelastic if coefficient of elasticity is less than 1
i.e. NOT sensitive to price change
Under Elastic Demand- how does price affect revenues?
Price increases → Revenue decreases
Price decreases →Revenue increases
How does revenue react to price under Inelastic Demand?
Price increases → Revenue increases
Price decreases → Revenue decreases
How is Income Elasticity of Demand calculated?
Ei= % Change Quantity Demanded / % Change in Income
Normal goods if Ei > 0 (demand increases more than income)
Inferior goods Ei (demand increases less than income)
How is Cross-elasticity of Demand calculated?
EXY = % Change in Quantity Demanded of Product X / % Change in the Price of Product Y
X and Y procut are subsitute goods if EXY > 0
X and Y procut are complement goods if EXY < 0
X and Y procut are unrelated goods if EXY = 0
Law of diminishing marginal utility
- Law of diminishing marginal utility: the more of resource consumed, the lower the marginal utility (satisfaction) will be for the next unit.
- As a result, a consumer maximizes satisfaction when the last dollar spent on each product generates the exact same amount of marginal utility
What is the Marginal Propensity to Consume (MPC)?
% of the next dollar of income that the consumer would be expected to spend
How much you spend when your income increases
Calculate = Change in Spending / Change in Disposable Income
What is the Marginal Propensity to Save (MPS)?
% of the next dollar of income that the consumer would be expected to save
How much you save when income increases
Calculate: = Change in Savings / Change in disposable Income
also
= 1 - Marginal Propensity to Consume
How is the multiplier effect calculated?
(1 / (1-MPC)) x Change in Spending
(1 / MPS) x Change in Spending
The multiplier refers to the fact than an increase in spending by consumers, businesses, or the government has a multiplied effect on equilibrium GDP. The reason for this is that increased spending generates increases in income to businesses and consumers which in turn increases their spending, which again
in creases the income of other consumers and businesses, etc.
How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.
One consumer spends money- which:→Increases the income of a business → Increases the income of a vendor*Increases income of employees →Increases tax revenue
Supply
- Supply is the quantity of a product or service that will be provided/supplied at various prices
- goes UP
- Direct relationship between the price and quantity supply
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
What is a supply curve shift?
When supply changes due to something other than price
Positive shift → increase, move to Right
Negative shift → decrease, move to the Left
What are the causes of a positive supply curve shift (shift Right)?
Supply increases at each price point when
- Price expectation - price will be higer for the good in the futures
- Number of sellers/producer increases - market can get flooded
- Government subsidies or technology improvements that decrease costs for suppliers
What are the causes of a negative supply curve shift (shift Left)?
Supply decreases at each price point when
- Cost of producing item increases
-
Prices of other goods -If other products can be produced with greater returns, producers will
pro duce those goods.
