Micro 1.Demand and supply Flashcards
What 6 factors cause shifts in demand?
Advertising
Population/ age structure
Seasons
Price of other goods (complements or subs)
Fashion + trends
Why does a demand curve actually shift?
A factor other than price has changed
What are the 4 types of goods
Normal
Inferior
substitute
complimentry
What are normal goods
Positive YED
Demand increases with income
What are inferior goods
Negative YED
Demand increases when income falls
Because you can’t afford better substitutes
What are substitute goods
Positive XED,
When price of one good decreases, so does the demand for the other good
Causes shifts in demand
What are complimentary goods
Negative XED,
When price of one good decreases, demand for other good falls
Causes shifts in demand
Income inelastic?
Normal good
0<YED<1
Change in income, smaller percentage change in Qd
Necessities
Income Elastic?
Normal good
1<YED<infinity
Change in income, larger percentage change in Qd
Luxuries
Formula for XED
%Change in Qd of good A
/
%Change in P of good B
What does XED do?
Helps to calculate how competing firms prices will affect demand for your product
what is PES
How responsive a change in Qs is to a change in price
What is the acronym for the factors of PES?
TEASS
What are the factors of PES?
Time
Economy’s state
Available factors of production
Spare capacity
Stock levels
How does time affect PES
In the short run PES = inelastic
Qs can’t increase by a lot
Short run = some factors of production are fixed
In the long run PES = Elastic
Qs able to rise by a large %
Long run = ZERO fixed factors of production
How does the State of economy affect PES?
Higher price = incentive to sell more
Bad state = available factors of production, e.g. unemployment = labor
Easy to increase Qs = Elastic PES
Good state = unavailable factors
Inelastic PES
How does the Spare capacity affect PES?
More spare capacity = output can be increased to use up resources
Hence elastic PES
How do available F.O.Ps affect PES?
Low availability = inelastic PES
High availability = Elastic PES
Easy to find resources and raise Qs
How do Stockpiles affect PES?
Large sums of goods stored for emergencies
Harder to stockpile organic goods- can expire (perishable)
Perishable goods = inelastic
If prices rise there’s no stockpile to sell quickly
Stockpile goods = Elastic
Perfectly inelastic PES?
Straight vertical curve
PES = 0, no response to change in price
Usually agricultural goods
Inelastic PES?
Steep curve
0<PES <1, no response to change in price
Elastic PES?
Flatter curve
1<PES <INFINITY
Perfectly Elastic PES?
Straight Horizontal curve
PES = INFINITY , infinite response to change in price
Goods that don’t give a profit if price ever drops
Unitary elastic
Perfectly diagonal, upward curve starting from the origin
PES = 1
Why does Qs increase?
Price consumers are willing to pay increases- more profit to be made (incentive)
We must assume producers want to maximize profit
What is supply
When a producer is willing and able to sell a product
What factors cause shifts in supply?
Changes in technology
Weather
Cost of production and capital - profit effects
Productivity
Number of suppliers- migration of workers
How does the price mechanism eliminate excess demand?
Consumers bid up price due to a shortage
Rationing quantity demanded as not all can afford it
Until market returns to equilibrium
How does the price mechanism eliminate excess supply?
Price mechanism signals a falling price to producers- consumers clearly want fewer goods
Falling price reduces incentive to supply- less profit
Producers decrease price to sell off surplus
Qs is reduced, market back to equilibrium
What are the three functions of the price mechanism?
Signaling - signals to producers that consumers want more / less goods
Incentivizing- Reduces / increases the incentive to supply; according to the amount of profit to be made
These are used to increase / decrease QS
Rationing- Limits QD by increasing the price; fewer consumers are willing and able to demand at higher prices
Used to decrease QD
