How markets work Flashcards
Define demand
the quantity of a product tat consumers are willing and able to purchase at various prices over a period of time.
Define consumer surplus
the extra amount that a consumer is willing to pay for a product above the price that is actually paid
What factors influence the demand for a product?
Price of the product
Consumer income
Tastes and fashions
The prices of other factors
Define disposable income
income after taxes on income have been deducted and state benefits have been added.
Define normal goods
goods for which an increase in income leads to an increase in demand
Define inferior goods
goods for which an increase in income leads to a fall in demand
Define substitutes
competing goods
Define complements
goods for which there is joint demand
Define supply
the quantity of a product that producers are willing and able to provide at different market prices over a period of time
Define producer surplus
the difference between the price a producer is willing to accept and what is actually paid.
Factors affecting supply
costs of production
size and nature of the industry
government policy
demand for the product
Define elasticity
the extent to which buyers and sellers respond to a change in market conditions
Define price elasticity of demand
the responsiveness of the quantity demanded to a change in the price of the product
How to calculate price elasticity of demand
% change in quantity demanded / % change in price
Define price elastic
where the percentage change in the quantity demanded in sensitive to a change in price.
Define price inelastic
where the percentage change in the quantity demanded is insensitive to a change in price.
Define income elasticity of demand
the responsiveness of demand to a change in income.
How to calculate income elasticity of demand
% change in quantity demanded / % change in imcone
Define income inelastic
goods for which a change in income produces a less than proportionate change in demand
Define income elastic
goods for which a change in income produces a greater proportionate change in demand
What value does an income inelastic good produce?
less than 1
What value does an income elastic good produce?
more than 1
What value does an inferior good produce?
Negative
Define cross elasticity of demand
the responsiveness of demand for one product in relation to a change in the price of another product
How to calculate cross elasticity of demand
% change in quantity demanded of product A / % change in quantity demanded of product B
What values do substitutes produce?
positive
What values do complements produce?
negative
The smaller the value of XED, the …
weaker the substitutes and complements
Define price elasticity of supply
the responsiveness of the quantity supplied to a change in the price of the product
Calculate price elasticity of supply
% change in quantity supplied / % change in price
If PES is between 0 and 1…
elasticity of supply is inelastic
if PES is greater than 1…
elasticity of demand is elastic
if PES is equal to 1…
a change in price causes an exactly equal proportional change in the quantity supplied.
What determines PES?
availability of stocks of the product
availability of factors of the product
time period
