Micro yr 1- Demand and supply

Question 1

What 6 factors cause shifts in demand?

Answer 1

Advertising
Population/ age structure
Seasons
Price of other goods (complements or subs)
Fashion + trends

Question 2

Why does a demand curve actually shift?

Answer 2

A factor other than price has changed

Question 3

What are the 4 types of goods

Answer 3

Normal
Inferior
substitute
complimentry

Question 4

What are normal goods

Answer 4

Positive YED
Demand increases with income

Question 5

What are inferior goods

Answer 5

Negative YED
Demand increases when income falls
Because you can’t afford better substitutes

Question 6

What are substitute goods

Answer 6

Positive XED,
When price of one good decreases, so does the demand for the other good
Causes shifts in demand

Question 7

What are complimentary goods

Answer 7

Negative XED,
When price of one good decreases, demand for other good falls
Causes shifts in demand

Question 8

Income inelastic?

Answer 8

Normal good
0<YED<1
Change in income, smaller percentage change in Qd
Necessities

Question 9

Income Elastic?

Answer 9

Normal good
1<YED<infinity
Change in income, larger percentage change in Qd
Luxuries

Question 10

Formula for XED

Answer 10

%Change in Qd of good A
/
%Change in P of good B

Question 11

What does XED do?

Answer 11

Helps to calculate how competing firms prices will affect demand for your product

Question 12

what is PES

Answer 12

How responsive a change in Qs is to a change in price

Question 13

What is the acronym for the factors of PES?

Answer 13

TEASS

Question 14

What are the factors of PES?

Answer 14

Time
Economy’s state
Available factors of production
Spare capacity
Stock levels

Question 15

How does time affect PES

Answer 15

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

Question 16

How does the State of economy affect PES?

Answer 16

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

Question 17

How does the Spare capacity affect PES?

Answer 17

More spare capacity = output can be increased to use up resources

Hence elastic PES

Question 18

How do available F.O.Ps affect PES?

Answer 18

Low availability = inelastic PES

High availability = Elastic PES
Easy to find resources and raise Qs

Question 19

How do Stockpiles affect PES?

Answer 19

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

Question 20

Perfectly inelastic PES?

Answer 20

Straight vertical curve
PES = 0, no response to change in price
Usually agricultural goods

Question 21

Inelastic PES?

Answer 21

Steep curve
0<PES <1, no response to change in price

Question 22

Elastic PES?

Answer 22

Flatter curve
1<PES <INFINITY

Question 23

Perfectly Elastic PES?

Answer 23

Straight Horizontal curve
PES = INFINITY , infinite response to change in price
Goods that don’t give a profit if price ever drops

Question 24

Unitary elastic

Answer 24

Perfectly diagonal, upward curve starting from the origin
PES = 1

Question 25

Why does Qs increase?

Answer 25

Price consumers are willing to pay increases- more profit to be made (incentive)

We must assume producers want to maximize profit

Question 26

What is supply

Answer 26

When a producer is willing and able to sell a product

Question 27

What factors cause shifts in supply?

Answer 27

Changes in technology
Weather
Cost of production and capital - profit effects
Productivity
Number of suppliers- migration of workers

Question 28

How does the price mechanism eliminate excess demand?

Answer 28

Consumers bid up price due to a shortage
Rationing quantity demanded as not all can afford it
Until market returns to equilibrium

Question 29

How does the price mechanism eliminate excess supply?

Answer 29

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