Markets Flashcards
What are the factors that affect demand?
-Price
-Price of substitutes
-Income
-Consumer preferences
What effects a movement along the demand curve?
-Endogenous variables i.e price and quantity
What effects a shift of the demand curve?
Exogenous variables
What are the factors that affect supply?
-The price of a product
-The cost and technology of production
-The number of firms operating in the market
What effects a movement along the supply curve?
-Endogenous variables i.e a change in price or quantity
What effects a shift of the supply curve?
Exogenous variables
What is the market clearing equilibrium?
Where the supply and demand curves intersect
What happens if the price is higher than equilibrium?
Excess supply
What happens if the price is lower than equilibrium?
Excess demand
What happens with an exogenous increase in demand?
-Demand curve shifts outwards
-Equilibrium price and quantity is higher
What happens with an exogenous increase in supply?
-Supply curve shifts outwards
-Equilibrium price is lower, equilibrium quantity is higher
What are the different types of elasticity?
-Own price elasticity of demand
-Cross price elasticity of demand
-Income elasticity of demand
-Price elasticity of demand
What is the equation for own price elasticity of demand?
-%change in quantity demanded/ %change in price
-[(dQ/Q)/(dP/P)]
-dQP/QdP
-(dQ/dP)*(P/Q)
What are the classes of elasticity?
-Elastic demand = modulus >1
-Inelastic demand =modulus <1
-Unit elasticity= modulus = 1
What does a perfectly inelastic demand curve look like?
- Perpendicular to x axis
-Quantity demanded stays the same no matter what the priceW
What does a perfectly elastic supply curve look like?
- Perpendicular to y axis
-Price stays the same no matter quantity demanded
How does price elasticity vary with a linear demand curve?
-Elastic until unit elasticity is reached
-Inelastic after unit elasticity
-Elasticity= (dQ/dP)*(P/Q)
-When Q=0, elasticity = infinity so highly elastic
-When P=0, elasticity =0 so inelastic
Why is own price elasticity always negative?
- An increase in price will always lead to a decrease in demand, so therefore own price elasticity is always negative
What is the equation for cross price elasticity of demand?
% change in quantity demanded in A/ % change in price of B
What is the cross price elasticity of substitutes?
- Substitutes have a positive cross price elasticity
What is the cross price elasticity of complements?
-Complements have a negative cross price elasticity
What is the equation for income elasticity of demand?
-% change in quantity demanded/ %change in income
What is the income elasticity of a normal good?
- Normal goods have a positive income elasticity
-This means that more is demanded with an increase in income
What is the income elasticity of an inferior good?
-Inferior goods have a negative income elasticity
-This is because as income increases, consumers switch to more expensive goods
What is the equation for elasticity of supply?
- % change in quantity/ % change in price
What sign is the elasticity of supply?
If the law of supply holds, the elasticity of supply is always positive
In the long run, are supply and demand elastic or inelastic?
-Demand is elastic as consumers can adjust their behaviour and switch to alternative products
-Supply is elastic as new firms can enter the market, existing firms can leave, and firms can alter their production
How does the supply curve change if the elasticity is higher?
The supply curve becomes steeper
How does the demand curve change if the elasticity is higher?
The demand curve becomes flatter
