Economics Flashcards
How does a price increase affect supply?
o When the price of an item increases, supply increases
o More sellers are willing to sell
When does a Supply Curve Shift and Demand Curve Shift Occur?
A change due to something other than price
What are the characteristics of a Positive Supply Curve Shift (Shift Right)?
o Supply increases at each price point
o Higher Equilibrium GDP
o Number of sellers increase (More companies selling, Market is flooded)
o Government market interference via subsidy (Grants or tax credits for wind farms)
o Technology Improvements (Fast internet makes e-commerce efficient)
What are the characteristics of a Negative Supply Curve Shift (Shift Left)?
o Supply decreases at each price point
o Lower Equilibrium GDP
o Cost of producing item increases (Price increases, Less products are made)
o Wars or Crisis (A country that makes rice gets attacked, Less rice on the market)
How does price affect the demand for an item?
When the prices of an item increases, demand for it decreases.
What is a Positive Demand Curve Shift (Shift Right)?
Demand increases at each price point
- Price of Substitute increases
- Future Price Increase is expected
- Market Expands
- Expansion
What happens to Supply/Demand if a Future price increase is expected?
Lower Supply, high demand.
Example:
War in Middle East breaks out; therefore, People line up at gas stations
What is a Negative Demand Curve Shift (Shift Left)?
o Demand decreases at each price point
o Price of compliment goes up (Price of ketchup rises, Less demand for beef)
o Boycott
o Consumer income rises (Demand for inferior goods drops as people have more money to spend)
o Consumer tastes change (A hot diet fad gets replaced by another)
o Contraction (Less spending decreases equilibrium GDP)
Marginal Propensity to Consume (MPC)
o How much you Spend when income increases
o Change in Spending / Change in Income
MPC + MPS = 100%
Marginal Propensity to Save (MPS)
o How much you Save when income increases
o Change in Savings / Change in Income
MPC + MPS = 100%
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?
Price increases, Revenue decreases
Price decreases, Revenue increases
Price and Revenue have an inverse relationship
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?
Price increases, Revenue increases
Price decreases, Revenue decreases
Price and Revenue have an direct relationship
What conditions would indicate Inelastic Demand?
“Income = Inelastic ”
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?
Total revenue will remain the same if price is increased Considered unitary if coefficient of elasticity = 1
How is Income Elasticity of Demand calculated?
% Change Quanitity Demanded / % Change in Income
Normal goods greater than 1 (demand increases more than income)
Inferior goods less than 1 (demand increases less than income)
What conditions occur under periods of inflation?
o Interest rates increase
o Reduces demand for loans
o Reduces demand for houses, autos, etc.
o Value of bonds and fixed income securities decrease
o Inferior good demand to increase
o Foreign goods more affordable than domestic
o Demand for domestic goods decrease
What happens under Demand-Pull inflation?
Overall spending increase
Demand increases (shifts right)
Market equilibrium price increases
What happens under Cost-Push inflation?
o Overall production costs increase
o Supply decreases (shifts left)
o Market equilibrium price increases
o Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
What is the Equilibrium Price?
The price where Quanitity Supplied = Quantity Demanded
