How Markets Work and Elasticity 1.2

Question 1

What does Elasticity Measure?

Answer 1

How much something has changed OR How responsive is Supply to the changes in Demand

Question 2

Demand

Answer 2

The quantity of a good that consumers are willing and able to buy at a given price in a given time period

Question 3

Effective Demand

Answer 3

A desire to buy the product is backed up by a willingness and ability to pay

Question 4

Latent demand

Answer 4

Aka Potential demand, there is a desire to buy the product but consumers lack the purchasing power

Question 5

Derived demand

Answer 5

Demand for a product linked to another

Question 6

What causes a shift in the demand curve?

Answer 6

Recession/Boom
Weather
Trends
Quality
Migration
Inflation
Population rising
Competition
Unemployment/ Increased Employment

Question 7

Supply

Answer 7

Supply is the quantity of a good that sellers are prepared to produce at any given price in a given time period

Question 8

Causes of shift of supply

Answer 8

New tech- lower cpu and faster to make
Prices of other goods- substitutes will become more attractive if the price of another increases
Gov- Any taxes or restrictions reduce supply, vice-versa
No. suppliers in the market- If the no. suppliers increase as will supply
Weather- Good weather, good harvest vice-versa

Question 9

Consumer surplus

Answer 9

Difference between what a consumer would pay for a product and what they actually pay

Question 10

Producer surplus

Answer 10

Difference between what producers are willing and able to supply a good for and the price they actually receive

Question 11

Function of price: Incentive to firms

Answer 11

A higher price encourages and allows firms to produce more

Question 12

Function of price: Signalling

Answer 12

Changes in price reflect in supply and demand, acts as a signal to producers and consumers.

Question 13

PED

Answer 13

% △ Quantity Demanded/ % △ Price

Question 14

Elasticity Rules

Answer 14

Perfectly Inelastic: 0
Price Elastic: More than 1
Unitary Elastic: 1
Price Inelastic: Less than 1

Question 15

PED Affected by

Answer 15

No. Substitutes
Time- over time more elastic demand becomes
Necessities tend to be price inelastic
Luxuries and wants tend to be price elastic
% of customers income spent on the good
Cost of changing products

Question 16

Income Elasticity of Demand

Answer 16

% △ Quantity Demanded/ % △ Income

Question 17

Normal goods

Answer 17

Have a positive income elasticity. When incomes rise demand for these goods rise. When incomes fall, demand for these goods fall.

Question 18

Inferior goods

Answer 18

Own brand goods have negative income elasticity. When incomes rise demands for these goods fall and when incomes fall demands for these goods rise

Question 19

Superior goods

Answer 19

Normal goods seen as luxuries. Demand for these increase when incomes rise and decreases when income falls. They are also income elastic as demand changes by a greater amount than income.

Question 20

Cross Price Elasticity of Demand

Answer 20

% △ In Quantity Demanded of X / % △ in price of Y

XED measures how responsive the quantity demanded of one good is to changes in the price of a different good

Question 21

Sign meaning in elasticity

Answer 21

Tells you if the product is a substitute good or a complementary good

Question 22

Size meaning in elasticity

Answer 22

Tells you how cross price elastic demand for that good is

Question 23

Substitute goods

Answer 23

Two goods that are substitutes will have +positive (more than 0) cross elasticity

Question 24

Complement goods

Answer 24

Two goods that are complements will have -negative (less than 0) cross elasticity

Question 25

Unrelated goods

Answer 25

These goods will have a cross price elasticity of 0

Question 26

Price Elasticity of Supply

Answer 26

% △ Quantity Supplied/ % △ Price

PES measures how responsive quantity supplied is to the changes in price