section 3 Flashcards
demand
the willingness and ability of a consumer to purchase a good or service at a given price in a given time period
law of demand
for most products, the quantity demanded varies inversely with its price
individual demand
the demand for a good or service by an individual consumer
market demand
the total demand for a good or service, found by adding together all individual demands
movements along the demand curve
when the price changes, leading to a movement right or left along existing the demand curve
shift of the demand curve
a complete movement of the existing demand curve either outward (to the right) or inward) to the left
changes in income effect on demand
normal goods = when income increases demand for normal goods increases
inferior = when income increases demand for inferior goods decreases
non price factors that change demand
changes in income
changes in taste fashion and advertising
changes in population
changes in price of a complement
changes in price of a substitute
speculation
supply
the willingness and ability fo a firm to supply a product at a given price in a given time period
law of supply
for most products, the quantity supplied varies directly with its price
individual supply
the supply of a good or service by an individual producer
market supply
the total supply of a good or service as a result of adding together all individual producers supplies
movements along the supply curve
when the price of the product changes, leading to a movement left or right along the existing supply curve
shift of the supply curve
the complete movement of the existing supply curve either outward (to the right) or inward (to the left)
non-price factors that cause changes in supply
the costs of production
productivity
new technology
indirect taxes
subsidies
number of firms
equilibrium
when qs = qd
when all the firms in the market supply a combined quantity to the combined quantity that all the consumers in the market demand
disequilibrium
qs ≠ qd
when excess supply occurs because price is too high or excess demand because price is too low
what does the equilibrium theory prove
shows that given time, the market will always adjust back to the equilibrium / create a new equilibrium
joint demand
when two ‘complement’ products are consumed together
demand for substitute goods
two ‘substitute’ products that can replace each other (inverse relationship)
composite demand
two products that require the same factor of production
derived demand
demand for one product is dependent on the output of another product (all factors of production are derived demand)
joint supply
two products that are both produced from the same factor of production
price elasticity of demand (PED)
measures the responsiveness of quantity demanded to a change in price
PED formula
ped = (% change in qd / % change in price)
PED > 1
elastic products
PED < 1
inelastic products
is PED pos or neg
assume PED is always neg (p and qd have a inverse relationship)
factors effecting PED
number of close substitutes
necessity or luxury
addictiveness
time
price as a percentage of income
total revenue
total income from selling goods and services
total revenue formula
tr = p x q
income elasticity of demand (yed)
yed measures the responsiveness of quantity demanded to a change in income
normal goods
income increases demand increases and vice versa
inferior goods
income increases demand decreases vice versa
yed formula
yed = (% change in qd / % change in income)
negative yed
inferior product
positive yed
normal product
yed greater or less than 1
same as PED (>1 = elastic and <1 = inelastic)
relevance of yed
shows what products will be increasing/decreasing output depending on booms and recessions (based on income)
cross price elasticity of demand (xed)
xed measures the responsiveness of the quantity demanded of one product to a change in the price of another product
xed formula
xed = (% changes in quantity demanded of b / % change in price of a)
positive xed
substitute
negative xed
complement
xed < 1
relationship is weak, weak substitutes / complements
xed > 1
the relationship is strong, strong substitutes/complements
price elasticity of supply
pes measures the responsiveness of quantity supplied to a change in price
pes formula
pes = (% change in quantity supplies / % change in price)
pes > 1
elastic products
pes < 1
inelastic products
the availability of stocks
if you can store a product, the product becomes more elastic
time
the quicker the product can be produced, the more elastic the product is
spare capacity in production
the more spare capacity left, the more elastic the product is
difference between pes elasticity
elastic pes is good
inelastic pes is not good
price mechanism
the interaction of the market forces of supply and demand
rationing function
increasing prices rations demand to those most able to afford the service
signalling function
prices provide important information to market participants
incentive function
price creates incentives for market participants to change their actions
allocative functions
the function of prices that acts to divert recourses to where returns can be maximised
allocative efficiency
occurs when consumer welfare is maximised
when quantity supplied = quantity demanded
advantages of the price mechanism
resolves the basic economic problem
consumer sovereignty
provides an argument for privatisation
disadvantages of the price mechanism
market failure
(under/no production
pollution
over production
inequality)
