MICRO 3 - Price determinations Flashcards
What is demand?
the quantity of a good or service that consumers are able and willing to buy at a given price during a given period of time
What will cause movements along the demand curve?
a change in price
Factors effecting the demand curve:
population, income, substitutes,/compliments, advertising, trends/fashions, seasons, necessity v luxury, quality
What is the law of demand?
an increase in price of goods or services leads to a decrease in qty demanded
What relationship is the demand curve?
inverse (slopes downwards)
What is the price elasticity of demand?
the responsiveness of a change in demand to a change in price
Equation for PED
% change in qty demanded / % change in price
What is the PED value of elastic demand?
greater than 1
What is the PED for inelastic demand?
between 0 and 1
What is the PED for unitary demand?
1
What is the PED for perfectly inelastic demand?
0
What is the PED for perfectly elastic demand?
infinity
Factors influencing PED:
necessity, substitutes, addictiveness/habitual consumption, proportion of income spent on the good, durability, peak / off-peak demand
What is income elasticity demand?
the responsiveness of a change in demand to a change in income
Equation for YED:
% change in qty demanded / % change in income
What is the equation for total revenue?
TR = price x qty
What are inferior goods?
demand falls as incomes increase (YED < 0)
What are normal goods?
demand increases as income increases (YED > 0)
What are luxury/giffen goods?
as income increases, there is an even bigger increase in demand (YED > 1)
What is cross elasticity demand?
the responsiveness to a change in demand of one good (A) to a change in price of another good (B)
Equation for XED:
% change in qty demanded of A / % change in price of B
What XED value do complementary goods have?
negative
What XED value do substitute goods have?
positive
What XED value do unrelated goods have?
0
What is supply?
the quantity of goods and services that producers are willing and able to supply at a given price during a given period of time
What causes movements along the supply curve?
price / profit motive
Factors that shift the supply curve?
productivity, indirect taxes, number of firms, technology, subsidies, weather, costs of production, wages
What is price elasticity of supply?
the responsiveness of a change in supply to a change in supply
Equation for PES:
% change in qty supplied / % change in price
What is the PES value for elastic supply?
greater than 1
What is the PES value for inelastic supply?
between 0 and 1 (smaller than 1)
What is the PES value for perfectly inelastic supply?
0
What is the PES value for perfectly elastic supply?
infinity
Factors that influence PES:
time scale, spare capacity, levels of stocks, how suitable factors are, barriers to entry to the market
What is equilibirum?
demand = supply
When is there an excess demand?
when demand is higher than supply
When is there excess supply?
when supply is greater than demand
What is derived demand?
when a particular good or FofP is necessary to produce another good or service
Example of derived demand:
increase in demand for healthcare = increase in demand for doctors + nurses
What is composite demand?
when one good is demanded for more than one use, and increase in demand for one use leads to a decrease in supply available
Example of composite demand?
steel for factories or cars
What is joint demand?
complementary goods
Example of joint demand?
increase in demand for cars = increase in demand for fuel
What is competing demand?
substitute goods
Example of competing demand:
increase in demand for coke = decrease in demand for pepsi
What is joint supply?
production of one good leads to the production of another good
Example of joint supply:
production of beef and leather
What is an example of an incentive?
high price, an incentive to increase production for profit
What is signalling?
a change in price signals consumers and producers a decrease in price will buy more
What is rationing?
goods are rationed only to those who can afford them, if supply decreases, price increases, rationing the demand
What is consumer surplus?
when a consumer pays less for a good than what they are prepared to pay
What is producer surplus?
when a producer receives more for a product than the price they are willing to accept
