Price system (Demand & Supply) 2 Flashcards

Question

What are the main features of a demand curve?

Answer 1

- Linear relationship - when D curve is drawn as a straight line. But price and quantity demanded can be related in non-linear way - Continuous relationship - can look at diagram and find out what price consumers would be willing and able to pay. - A time-based relationship - usually weekly - Other things equal, ceteris paribus Demand curves allow the estimation of how much consumers may spend on a product, and how much rev firms receive from selling a quantity of this product

Answer 2

a line plotted on a graph that represents the relationship between quantity supplied + price of product

Answer 3

data from which a supply curve is drawn on a graph

Answer 4

- A positive / direct relationship between price + quantity supplied. Means that 1) when price rises, increase in quantity supplied + 2) when price lowers, decrease in quantity supplied - Changes in price cause a change in the quantity supplied. Movements shown by up + down the supply curve. Assumed that all other factors affecting supply remain unchanged

Answer 5

1) A casual relationship - price changes cause the change in quantity supplied 2) A linear relationship - supply curve is drawn for simplicity as a straight line. Would be acceptable for the supply curve to be represented in a non-linear way like upward slopping curve supply at a certain price 3) A time based relationship - time period usually in weekly

Answer 6

Ability to pay determines effective demand. A positive relationship between income and demand. Increase in ability to pay leads to increase in demand. Ability to pay falls, less is demanded. = normal goods (most products). Some products have neg relationship, les is purchased as income rises = inferior goods (poor quality, used). Better off consumers buy superior quality with increased income. In recession, consumers buy more inferior goods to replace normal goods.

Answer 7

where quality demanded increases as income rises

Answer 8

where the quantity demanded increases as income decreases

Answer 9

1) Substitutes - alternative goods that satisfy a want or need. Change in price of one likely to effect demand of the other, depending on degree of substitutability (how close it is to the product) (coke + pepsi) 2) Complements - goods that have joint demand, add to satisfaction that consumers get from another product. A change in price or availability of either one of these products will have effect on demand fora complementary good (car + petrol)

Answer 10

More difficult to determine, depends on individual choice + behaviour. Might be built up over time or influenced by what they have read or what advertisers want consumers to believe about product.

Answer 11

Firms' supply decisions always drive up cost of production + distribution of products to customers. Labour costs, cost of energy or transport, productivity of workers can have impact on costs, replacing labour with capital may reduce costs in some firms.

Answer 12

If industry grows in size, more products supplied. This growth may attract new entrants, increasing competition, prices may fall resulting in some firms leaving the industry. Some industries have deliberate supply restrictions to keep prices up.

Answer 13

Most firms are continually aware of competitors. If competitor lowers price, other firms could supply less products to keep their price unchanged. If competitor increases price, other firms can supply more (if they can keep their costs under control)

Answer 14

Gov's influence companies + their supply of products. New tax on products reduces supply: subsidies usually result in an increase in supply. Can impose taxes like excise/ad valorem tax on the output of firms or general sales tax on consumers. Impact of tax = cost increase as forms may pass on tax to consumer by higher prices. Indirect tax = decrease in supply. Less tax or subsidies can increase supply by encouraging firms to reduce prices for output.

Answer 15

In agricultural markets, supply is affected by uncertain weather conditions.

Answer 16

a tax levied on g+s like a general sales tax

Answer 17

an increase in the quantity demanded or quantity supplied

Answer 18

a decrease in the quantity demanded or quantity supplied

Answer 19

How the quantity supplied responds to a change in the price of the product. An increase in quantity demanded or supplied = extension of demand/supply. A decrease in quantity demanded or supplied = contraction of demand/ supply

Answer 20

Its in response to a change in any of the non-price determinates of demand/ supply. Such shifts to the right or left depends on the cause. A shift to the right is an increase in demand or a increase in supply; a shift to the left is a decrease in demand or a decrease in supply.

Answer 21

a numerical measure of responsiveness of one variable following a change in another variable, ceteris paribus or other things equal.

Answer 22

where the relative change in the quantity demanded is greater than the change in price, income or the prices of substitutes and complements.

Answer 23

where the relative change in the quantity demanded is less than the change in price, income or the prices of substitutes and complements

Answer 24

measures of the responsiveness of the quantity demanded for a product following a change in prices of the product

Answer 25

when the relative change in the quantity demanded is greater than the change in price of the product

Answer 26

when the relative change in quantity demanded is less than the change in price of the product

Answer 27

Its the negative (or inverse) relationship between price and quantity demanded, as price does up, quantity demanded goes down. As price decreases, quantity demanded increases. (economists usually ignore neg sign)

Answer 28

measures the responsiveness of the quantity demanded for a product following a change in consumer income. If demand is responsive to change in income, % change in quantity demanded greater than % change in come = income elastic outcome, YED is greater than 1 If demand is not responsive to income change, quantity demand in income = inelastic, value less than 1.

Answer 29

measures the responsiveness of the quantity demanded for one product, following a change in the price of another product. Demand is cross elastic when quantity demanded for one product responds more than proportionately to change in price of another product = XED greater than 1. When quantity demanded for one product responds less than proportionately to a change in the price of another product, demand is said to be cross inelastic = XED less than 1.

Answer 30

quantity demanded increases as income increases = most goods. YED is pos + expected to be between 0 and 1

Answer 31

quantity demanded decreases as income rises or increases as income falls = poor quality products. YED is neg, size indicates relationship between change in come + quantity demanded.

Answer 32

Type of normal good. Quantity demanded unlikely to change as income changes = Staple foodstuff. YED is pos but close to zero. Low value for YED shows limit to quantity of these goods households purchase even in change of income.

Answer 33

Positive YED greater than 1. Is a normal good where quantity demanded is responsive to change in income. Higher the YED = greater the change in quantity demanded.

Answer 34

Sign of XED (pos or neg) is NB as it indicates relationship between the two goods. 1) When XED pos, two goods are substitutes = increase in price of one good causes increase in quantity demanded of the other good. 2) XED id neg when two products are complements/ jointly demanded. Increase in price of one product causes decrease in demand for other product (who's price remained unchanged).

Answer 35

where all that is produced is sold at a given price. At 10$ no demand, but at 9$ demand is infinite. (Horizontal)

Answer 36

Where % change in demand is bigger than % change in price, like luxury items or goods with lots of substitutes. Has value greater than 1. Change in demand is proportional to change in price, indicates consumers respond to external factors when buying a product. (Almost flat line / downward sloping)

Answer 37

where the change in price is relatively the same as the change in quantity demanded. when % change in demand = % change in price, for normal goods. Demand is said to have unit elasticity over particular price range. PED = 1. ( Akuut line, 45 degree)

Answer 38

% change in demand is smaller than the % change in price. Demand remains relatively constant even with changes in economic factors. Change in price causes only small % change in demand. Usually for necessities of life goods. 0< elasticity of demand <1. ( Very vertical, steep downward sloping)

Answer 39

where a change in price has no effect on the quantity demand. PED values from ) to infinity. Regardless of price change, consumers willing to + able to buy same amount. Goods essential to life. Elasticity of demand is 0. (Vertical line)

Answer 40

PED is not always the same throughout entire demand curve. When prices are high + quantity demanded is low, a large change price will not be large % change. Demand is price elastic on upper part of demand curve and PED is inelastic in lower part of demand curve.

Answer 41

- Availability and attractiveness of substitutes - Relative expense of the product - Time period

Answer 42

1) Greater number of substitutes and the more closely substitutable products are, the more consumers will switch between products as price rises / or toward product if price falls. 2) NB to distinguish between substitutability of products within same group of products + substitutability with goods of other groupings. 3) Goods can have fairly high PED because of range of substitutes. More groupings products are classified into, more price elastic. The narrower the market, PED will be greater 4) Quality + extent of info about products consumers need to satisfy wants + needs 5) Whether necessity or luxury. Essential good = price inelastic. Luxury = price elastic, consumers can do without them. 6) Addictive properties of product = likely more i=price inelastic 7) Brand image of product (can be price inelastic)

Answer 43

Rise in price reduces the purchasing power of a person's income + ability to pay for products. Larger proportion of income that price represents, the larger impact on consumers' income as result of price change. Greater the relative proportion of income accounted for by products, the higher the PED

Answer 44

Short run = hard for people to change spending patterns. Long run = if price goes up and stays up, over time people will adapt + adjust, PED of product increases over time. Price inelastic as consumers look at other products in market

Answer 45

Availability of substitute goods, necessity of the g+s, proportion of income spent on the g or s.

Answer 46

Whether goods are complements or substitutes (depends on costs of substitution), strength of brand loyalty for a product.

Answer 47

Total expenditure = price x total rev for a firm. NB when firm is planning a price change, aware of likely PED for a product: - When demand in price inelastic, business can increase price to increase rev, Reducing price not smart as rev will fall. - When demand is price elastic, business should decrease price to increase quantity demanded + thus rev. Increasing price would only decrease sales + rev.

Answer 48

- Persuasive advertising to influence consumers to buy product, highlights benefits compared to substitutes = shift to right on demand curve, increase sales without price change - Brand image for product to make it seem superior to similar products from competitors - Firm can take over/ merge with competitor to increase market share + thus control over market - Firm can create monopoly product: firm is only producer of product protected by patent or regulations

Answer 49

Difficult, can be done if product one of many in market where demand is price sensitive. Retailers use slares promotions to increase sales by reducing price of product with intention that consumers continue to buy product when promotion ends. This risky, competitors can make same price reduction + all producers lose out.

Answer 50

Can explain: - price variations - impact of changing prices on consumer expenditure and sales revenue - effects of changes in indirect taxes on gov income

Answer 51

Businesses use price variation to increase their revenue. They are aware of variations of PED in their markets + try to use opportunities presented to them to increase sales and revenue.

Answer 52

YED provides info on how quantity demanded varies with change in income. Can be very NB for forecasting future demand for range of g+s. If YED for normal good is greater than 1, demand will grow more quickly than consumer incomes, usually in times of sustained economic growth. During recession, these firms suffer reduced demand. If YED is negative, for inferior goods, firms producing these can expect sales to decline when economy doing well + in recession, demand will likely increase.

Answer 53

Firms concerned about the impact competitors' pricing strategies will have on the demand for their own products. Substitutes = pos XED. Higher price = consumers likely buy cheaper substitute. Higher degree of interdependence between suppliers, dangers of competitors cutting its price = significant. Size of XED is NB. Higher XED leads to greater decrease in quantity demanded. More firms want consumers to buy range of complementary products, not just one. XED identifies most complementary products + help firms introduce a pricing system that generates more rev.

Answer 54

a numerical measure of the responsiveness of the quantity supplied to a change in the price of the product. Supply curve is upward-sloping = PES always positive.

Answer 55

the quantity supplied responds more than proportionately to a change in its price. PES greater than 1.

Answer 56

the quantity supplied responds less than proportionately to a change in its price. PES less than 1.

Answer 57

It is not possible for a producer to increase or decrease supply, regardless of any change in price of the product.

Answer 58

Key to PES is flexibility. If businesses are more flexible in how they operate, supply tends to be more elastic. Main influences: 1) Availability of stocks 2) Time period 3) Productivity capacity

Answer 59

The ease with which firms can accumulate or reduce stocks of goods can influence PES. Stocks allow companies to meet variations in demand through changing output rather than changing the price. The more easily producers can do this, the higher the PES. Firms providing services can't build stocks because usually their supply is fixed in short-term.

Answer 60

Time-period or ease with which producers can increase production. In short-run = businesses + industries with spare productive capacity tend to have higher PES. However shortages of critical factor inputs (skilled workers, fuel components) can lead to an inelastic PES.

Answer 61

Over time, firms may increase their available productive capacity by investing in more capital equipment (tech advances). Over time, businesses can enter of or leave an industry + this will increase flexibility of supply.

Answer 62

In short run PES for agricultural firms, more price inelastic than PES for manufactured goods. Businesses hold stock for variations in demand. In long run, increase in demand is expected to persist, scale of business can expand to increase productive capacity, takes times depending on scale of change required. In agricultural markets = market supply more price inelastic than manufactured goods. Supply unstable as crop yields are difficult to predict due to external factors. Stability of global markets is affected by changes in demand for manufactured goods + agricultural products. Changes in demand have greater effect on agricultural markets than manufactured goods markets where PES is inelastic. When PES is price elastic, effects of changes in demand on price is not as big as when PES is price inelastic.

Answer 63

a situation where there is no tendency to change in a market. Quantity demanded = quantity supplied.

Answer 64

a situation where demand and supply are not equal in a market.

Answer 65

Real world markets are invariably in disequilibrium as market supply and demand are not equal. Excess demand is usual. Market mechanisms adjust supply or demand to reach the equilibrium position. Excess supply = shows price is too high, suppliers must reduce prices. Excess demand = shows suppliers should increase price of product, price continues to increase until market reaches new equilibrium position and clears price mechanism.

Answer 66

the price where demand and supply are equal, where the market clears.

Answer 67

the amount that is traded at the equilibrium price.

Answer 68

If quantity supplied is greater than quantity demanded = unplanned stock building. Firms can react by cutting prices or reducing quantity they supply. More consumers will want to buy, disequilibrium will narrow. If no changes to conditions of demand + supply and firms aren't prevented to produce, market price + quantity will go back to equilibrium. If quantity demanded greater than quantity supplied (excess demand), consumers will want a good deal. But low prices + low supplies not enough to meet demand, run out of stock, unmet orders. Profit-hungry firms will raise prices, increase number of items for sale. Quantity demanded will fall, market will adjust back to equilibrium and clear. Motives and plans of consumers and suppliers always drives it back to equilibrium place, but takes long time.

Answer 69

A shift in demand or supply curve due to a change in factors other than price of the product. Aren't always constant.

Answer 70

Rightward shift indicates an increase in demand Leftward shift indicates a decrease in demand

Answer 71

- Income / the ability to pay - The price and availability of related products - Fashion, taste and attitudes

Answer 72

things that influence someone's ability to pay: 1) income (purchasing power of income) 2) availability of loans or credit and the interest rate that must be paid on loans or credit card balances Increase in income, right shift in demand curve. Decrease in ability to pay can also increase demand.

Answer 73

if price rises, the demand for substitutes will increase as consumers switch demand to cheaper products = demand curve to the left. Will shift to the right if price for substitutes increase or positive report in media of healthier report. For complements, rise in price of one product reduces quantity demanded of it + associated product. Fall in price will increase quantity demanded of it + its complement.

Answer 74

An individual's behaviour is a reflection of their tastes, preferences towards different types of g+s. (reputation for reliability, better quality, fashionable)

Answer 75

Change in non-price factors: - Rightward shift indicates an increase in supply - Leftward shift indicates a decrease in supply

Answer 76

1) Changes in the prices of other products 2) Size and nature of the industry 3) Costs associated with supply 4) Government policy

Answer 77

Both supply and demand conditions change simultaneously. Increase of demand puts upward pressure on price. But simultaneous increase in supply puts downward pressure on price. Resulting effect = equilibrium price is unchanged, although significant increase in quantity traded.

Answer 78

A specific tax that is levied on goods like cigarettes.

Answer 79

a tax that is charged as a given % of the price

Answer 80

Alternative demand = substitutes. A rise in price of one product will lead to an increase in demand + rise in price of substitute product Joint demand = complement, its consumed with another product. An increase in supply will see the price of one product fall, prompting and increase in demand for the complement. Derived demand = where the demand for g+s depends upon the use that can be made from it. Something is required because its needed for the production of other goods + services. usually labour. Demand for hotel workers from demand for hotel services. Joint supply = when two items are produced together but for different purposes. Increase in demand leads to an increase in supply + fall in price.

Answer 81

Prices have NB role in allocation of resources in market economy. Price mechanism works automatically = 'invisible hand' by Adam Smith. 1) Rationing 2) Signaling and transmission of preferences 3) Provision of incentive

Answer 82

Rationing is where a producer limits the supply of products in market to ensure the product remain exclusive. This process is automatic. Exclusive products likely have high prices, rationing happens because of high prices. Demand is limited, ensures it is in line with quantity supplied in the market.

Answer 83

where decisions taken by buyers or sellers are determined by price

Answer 84

the automatic way in which the market allows the wants of consumers to be made known to producers

Answer 85

Prices act as signal to producers + consumers. Rise in quantity demanded = increase of price, signaling to produces to put more products on the market If consumers withhold demand ( too expensive, not liked), prices will fall. This signals to producers less should be produced or to improve product, price mechanism works in such a way that outcome is new equilibrium position with consumers' demand = producers' supply.

Answer 86

when low or high prices influence consumption and production by encouraging buyers to consume + sellers to produce.

Answer 87

Low prices + special offers (like discounts) encourage consumers to buy more goods. They get more satisfaction from consuming a product they think is a good deal. Higher prices can stop consumers purchasing a good but can encourage suppliers to produce more for the market in a way that low prices can discourage their willingness to supply. If low prices persist, suppliers may decide to exit market.

Answer 88

the difference between the price a consumer is willing to pay for a product + its market price.

Answer 89

Demand curve shows how much consumers are willing to pay for different quantities of products they want to consume. Mostly, price is given and firms are unable to charge lower/ higher according to customer level of satisfaction. When price falls = more demanded, product appeals to more consumers, rise in price = fall in demand, price increase is greater than satisfaction of some of the consumers. As price increases, consumer surplus decreases = less people are prepared to pay higher prices. Fall in market price causes increase in consumer surplus for new and existing customers, they're willing to buy more of product at reduced price.

Answer 90

the difference between the price a producer is willing to accept and what is actually paid

Answer 91

Producers are keen to supply to consumers willing to pay above price they normally accept. Such customers add extra revenue. This additional rev = producer surplus. Extent of this producer surplus is shown above supply curve but below price line P1. Selling below P1 = selling at discounted price. Below P, producers unwilling to sell, as cost of production is not covered.

Answer 92

- Quality of the product - Necessity of the service - Demands of the market - Convenience of the purchase - Competitors' service - Amount of the good

Answer 93

Impact of price change on consumer surplus: - the extent of price change, large change in price = greater the change in consumer surplus - price elasticity of demand, when demand is price inelastic, increase in price will see less of fall in consumer surplus, then if demand is price elastic. Elastic= area of loss of consumer surplus is bigger.

Answer 94

Impact of price change on prod surplus depends on: - extent of price change, greater change (up or down) = greater change in producer surplus - price elasticity of supply, if elastic = increase in price causes greater producer surplus than if supply is inelastic. Already producers in markets willing to supply at lower price, increase in price adds to consumer surplus for the same increase in price, gain in producer surplus bigger when demand is elastic.

Answer 95

The sum of consumer and producer surplus together in a market represents the net benefit to society of a market's operations.

Price system (Demand & Supply) 2 Flashcards

2) price system and the microeconomy