Economics Flashcards
How does a price increases affect supply?
When the prices of an item increases, supply increases because more sellers are willing to sell.
What is supply curve shift?
A supply curve shift happens when supply changes due to something other than price.
What are the characteristics of a positive supply curve shift (shift right)?
- Supply increases at each price point.
- Higher Equilibrium GDP
- Number of sellers increase: market can get flooded.
Examples: Government subsidies or technology improvements that decrease costs for suppliers
What are the characteristics of a negative supply curve shift (shift left)?
- Supply decreases at each price point.
- Lower Equilibrium GDP
- Cost of producing item increases
Examples:
- Shortage of gold - so less gold watches are made;
- Wars or crises in rice-producing countries means there is less rice on the market.
How does price affect the demand for an item?
When the price of an item increases, demand for it decreases (inverse relationship)
What is a Demand Curve Shift?
A demand curve shift happens when demand changes due to something other than price.
What is a Positive Demand Curve Shift (Shift Right )?
- When demand increases at each price point
- Price of substitutes go up - e.g. price of beef rises, so people buy more chicken
- Future price increase is expected - e.g. War in Middle East: long lines at gas pumps
- Market expands - e.g. people get new free health care plan- demand at clinic rises
- Expansion - more spending increases equilibrium GDP
What is a Negative Demand Curve Shift (Shift Left)?
- Demand decreases at each price point.
- Price of complement goes up - e.g. price of beef goes up - less demand for ketchup
- Boycott - e.g. Company commits social blunder - consumers boycott
- Consumer income rises - e.g. Demand for inferior goods drops as people have more money to spend
- Consumer tastes change
- Contraction - less spending decreases equilibrium GDP
What is the Marginal Propensity to Consume?
MPC is how much you spend when your income increases.
Calculate: Change in Spending / Change in Income
What is the Marginal Propensity to Save?
Marginal Propensity to Save is how much you save when income increases.
- Calculate: Change in Savings / Change in Income
- Also equals 1 - Marginal Propensity to Consume
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases, the demand curve increases (shifts right).
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
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
Under elastic demand, how does price affect revenues?
Under elastic demand, when:
- Price increases, Revenue decreases - Price decreases, Revenue increases
What conditions would indicate Elastic Demand?
-Many substitutes (luxury items)
-Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)
- Price increases - Revenue decreases
- Price decreases - Revenue increases
How does revenue react to price under Inelastic Demand?
Under Inelastic Demand, when:
- Price increases, Revenue increases.
- Price decreases, Revenue decreases.
What conditions would indicate Inelastic Demand?
-Few substitutes (groceries - gasoline)
-Considered inelastic if coefficient of elasticity is less
than 1
5% drop in demand / 10% increase in price = .5 (inelastic)
- Price increases - Revenue increases - Price decreases - Revenue decreases
What is Unitary Demand?
Unitary demand means:
-Total revenue will remain the same if price is increased. -Considered unitary if the coefficient of elasticity = 1
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income
-Normal goods > 1 (demand increases more than
income)
-Inferior goods < 1 (demand increases less than
income)
What conditions occur under periods of inflation?
- Interest rates begin to increase
* Reduced demand for loans
* Reduced demand for houses, autos, etc. - Value of bonds and fixed income securities decrease
- Inferior good demand to increase
- Foreign goods more affordable than domestic
- Demand for domestic goods decrease
What happens under Demand-Pull inflation?
- Overall spending increases
- Demand increases (shifts right)
- Market equilibrium price increases
What happens under Cost-Push inflation?
-Overall production costs increase
-Supply decreases (shift left)
-Market equilibrium price increases
Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase.
What is the Equilibrium Price?
The price where Quantity Supplied = Quantity Demanded
