MICROECONOMICS Flashcards
What is demand?
The amount that consumers are willing and able to buy at each given price point
What is effective demand?
Demand backed by the ability to pay
What is an extension in demand?
Increases in quantity demand caused by falls in price
What is a contraction in demand?
Decreases quantity demand by on increase in price
What are the determinants of demand (ped)?
- change in income
- change in population
- price of subs/complementary goods
- trends
- quality changes
- Interest
- consumer confidence
- future prices
- advertising
What is an inferior good?
As income rises demand falls
What is a normal good?
As income rises demand rises
What is a complementary product?
One that is consumed with another
What is a substitute good?
A good that can be used as an alternative to another
What is composite demand?
A good that is demanded for more then one purpose so that an increase in demand for one purpose reduces the supply for the other purpose
What is derived demand?
When the demand for one good comes from the demand for another good or service usually a component of another
(Labour is derived from goods and services)
What is price elasticity of demand?
Measures the responsiveness of quantity demanded to a change in price of the good
Is ped positive or negative?
Always negative - inverse relationship as price goes up, demand goes down.
What is price elastic demand?
What does a fall in price do to demand?
Below - 1
A fall in price means quantity demanded increases by proportionally more than the cut price
What does a fall in price do to revenue if its price elastic
Increases total revenue
What is price inelastic demand?
What does a fall in price do to demand?
Between 0 and -1
When prices fall quartiy demanded increases but by a smaller proposhen than the cut price
What does a fall in price do to revenue if its price inelastic?
Total revenue falls
What is perfectly price inelastic demand?
What does a change in price do to demand?
Ped = 0
When price changes there is no effect on quantity demanded
What does a fall in price do to revenue if its perfectly price inelastic?
Total revenue falls
What is perfectly price elastic demand?
What does a change in price do to demand?
Ped = infinity
A change in price eliminates all demand for the good
What is unitary price elasticity of demand?
What does a change in price do to demand?
Ped = -1
A change in price brings about the same proportionate change in quantity demanded
What does a fall in price do to revenue if its unitary price elastic?
Total revenue will remain the some from a price cut
What factors determine ped?
Availability of subs
Time
Luxury or necessity
Proportion of income spent on a good
What is yed?
Measures the responsiveness of quantity demanded to a change in income
What is income inelastic of demand?
Between 1 and 0 or 0 and -1
What is income elastic demand?
Above 1 or less than -1
What good is a negative number (yed)?
Inferior good
What good is a positive number (yed)?
Normal good
What is Xped?
A measure of the responsiveness of quantity demanded of one good to a change in the price of another good
When xped is positive the good is….
A substitute
When xped is negative the good is….
A complement
Xped for weak subs is?
Between 0 and 1
Xped for strong subs is?
Above 1
Xped for weak complements is?
Between 0 and -1
Xped for strong complements is?
Less than -1
When xped is 0….
The two goods are independent of each other
What is supply?
The amount offered for sale by producers at each given price level
What are the 3 functions of price?
- rationing
- incentivising
- signalling
What happens when prices rise (supply)?
- consumers ration
- producers incentivise
- entrepreneurs enter price rise market
What are the determinants of supply?
- Cost of raw materials
- technological improvements
- Changes in labour productivity
- Wage rates
- joint supply
- Subsides / taxes
- weather
- changes in number of firms
What is joint supply?
Where on increase or decrease in the supply of one good leads to on increase or decrease in supply of a by product
What is price elasticity of supply?
Measures the responsiveness of quantity supplied to a change in price
How do you calculate pes?
% Change in quantity supplied ÷ % change in price
What is price elastic in supply?
Pes > 1
What is price inelastic in supply?
Pes < 1 but > 0
What is perfectly inelastic supply?
Pes = 0
What is perfectly elastic in supply?
Pes = infinity
What is unitary price elastic in supply?
Pes = 1
What are the factors affecting pes?
- Time
- availability of stocks or stock piling
- Ease of switching between alts
- availability of spare capacity
- raw materials
What is equilibrium?
The price at which demand is equal to supply and there is no tendency for change
What is disequilibrium?
The price at which supply does not equal demand, there is likely to be a further change or reaction by buyers or sellers
What is joint demand?
Demand for one good is linked to the demand for another good.
What is joint supply?
2 or more goods that derive from the same production process
What are the uses of PED?
- Determination of pricing I revenue impact
- indication of competition faced
- price setting
- government decision on which goods to tax indirectly
What are uses of XPED?
- Marketing strategies eg. Bundles
- if a competitor changes it’s price firms can work out the effect on demand
What de uses of YED?
- Effect of recession / growth on demand
- business planning for product range
- helps firms anticipate future demand
What de uses of YED?
- Effect of recession / growth on demand
- business planning for product range
- helps firms anticipate future demand
