Module 10 Flashcards
Price Elasticity of Demand calculation?
% change in quantity demanded / % change in price
(Q2-Q1/Q1 / (P2-P1)/P1
How to calculate the cross-price elasticity of Demand?
% change in quantity of A demanded / % change in price of B
Substitute +
Complementary -
How to calculate the income elasticity of Demand?
% change in quantity demanded / % change in income
Normal +
Inferior -
How to calculate the price elasticity of supply?
% change in quantity supplied / % change in price
Total cost =
Variable cost + fixed cost
What factors help explain the law of demand?
Law of diminishing marginal utility: Once consumer bought one the extra benefit from having more decreases
Income effect: constrained by available income
Substitute effect: more likely to find and switch to substitute as become cheaper
Demand is?
Quantity of goods buyers are willing and able to purchase
Negative gradient £y Quantity x
How to arrive at a market demand curve?
Add together individual curves of all the consumers in the market
Individual consumer have own relationship between price and demand for a product
Demand curve shifts
Left if demand decreases
Right if demand increases
Price changes causes movement along the curve
What causes the demand curve to shift?
Price of other goods
Consumer income
Advertising / tastes
If a substitute price falls
Demand curve for original shifts to the left
More substitutes more elastic the demand
Price of complementary falls
Demand curve shifts to the right (more demand for original to go with it)
Consumer incomes normal and inferior goods?
Demand for Normal goods increases as income rises
For inferior goods decreases as income rises
Other factors on market demand
Age structure Income distribution Size of population Expectations of future rises Legislation
PED results mean? Elastic = sensitive
PED > 1 demand is elastic
Revenue increase when price is lowered
PED < 1 is inelastic
Revenue will fall when price is lowered
Perfect elasticity?
PED infinity
Horizontal line
Price shift demand falls to 0
Perfect inelasticity?
Demand unaffected by price
PED 0
Vertical line
Unit elasticity?
PED is 1
Curved line is a proportionate change
Revenue unaffected by change in price
Factors affecting PED?
Substitute products
Advertising and time
Luxury (PED higher) or necessity (PED lower)
Time (short run have less time to adjust spending patterns)
Proportion of income
Cross PED for substitute and complementary?
Positive for substitute
Negative for complementary
Link between income and demand formula IED
% change in quantity / % change in income
Normal Good if income rises IED > 0 +
Inferior good IED < 0 -
Supply curves
Positive gradient
Change is price move along it
Factors influences the position of the supply curve
Cost of making rise, shift to left
Technology, improvement shift to right
Government regulation, tighter shift to left
Profitability of alternative products, rises shift to left
Price elasticity of supply?
% change quantity / change price
PES > 1 elastic
PES < 1 inelastic
Factors influencing the price elasticity of supply?
Time period- short run can’t adjust so inelastic
Cost of changing output- high difficult to switch supply inelastic
Type of good- some fixed perfectly inelastic
The market mechanism
Cross of supply and demand curves where meeting point is the equilibrium where quantity produced is quantity wanted
Above cross S>D
below cross D>S
What are the factors of production?
Land
Labour
Capital- man made inputs
Enterprise- organisation of the other three
What is short run?
Period of time in which not all the factors of production can be varied
What is long run?
Period of time in which all factors can be varied
What are fixed and variable costs?
Fixed- don’t change in the short run even though output changes
Variable- do change with output
Total cost =
Variable + fixed
What is marginal cost?
Cost of making one additional unit
= Total cost of N - total cost of N-1
What is marginal revenue?
Increase in total revenue from selling more than one unit
MR > MC makes sense to increase productivity as extra revenue from producing and selling the extra unit more than covers extra cost so profits increase
MC>MR increasing production reduce profit not sensible to do so
Profit is maximised when?
Marginal cost = marginal revenue
What is the normal profit?
Minimum amount to keep owners interest in continuing to work
Total costs=total revenue
What is supernormal profit?
Revenue exceeds total costs
What are the four market structures?
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Characteristics of perfect competition?
Identical products
Each buyer and seller is small
Free entry and exit in the long run
Perfect information- aware of all costs and tech
Each firm is a price taker - small and no power
Demand curve horizontal (perfectly elastic)
What is a Monopoly?
Arise when no close substitutes and only one firm producing it
No competition and considerable market power
Potential to earn supernormal profits
High barriers to entry:
- Natural, economies of scale
- Legal, patent
- Artificial, brand loyalty
Price maker
Demand curve is industries demand curve
Incentive for efficiency and cost control is eroded
Can drive up prices but economies of scale can keep low
What is monopolistic competition?
Similar to perfect as still a large number of small suppliers
Free entry and exit
Difference: products differentiated oi
Brand loyalties develop
Degree of market power
Many firms so actions of one firm effectively diluted
Short run supernormal profits
Long run normal profits
What is an oligopoly?
Small number of firms that each supply a large proportion of the market
Actions of one firm affect actions of other: interdependent
Must take into account rivals and their reactions
Entry difficult due to competing with large well established companies with economies of scale
Collusion may happen illegally
