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Economics > Supply And Demand > Flashcards

Supply And Demand Flashcards

1
Q

Shortage

A

Excess demand - more is trying to be bought than is produced

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2
Q

What does a shortage do?

A
  • there will be a bidding war amongst onsumers to buy scarce goods
  • as P increases there will be some contraction of D
  • As P increases, this SIGNALS to entrepreneurs to produce more S
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3
Q

Unitary elastic demand

A

When a change in price leads to equal proportional change in demand

  • e.g. P increases by 5%, Qd decreases by 5%
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4
Q

What does the supply curve show?

A

The cost of producing each item

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5
Q

Marginal cost of production increases as

A

Output increases

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6
Q

Supply curve gradient

A

Positive

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7
Q

The demand curve shows

A

The total quantity bought at any given price

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8
Q

Extension of supply

A

When the price rises, firms respond by increasing output

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9
Q

Contraction of supply

A

When the price falls, firms respond by resuming output

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10
Q

Extension of demand

A

When price falls, consumers respond by buying more

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11
Q

Contraction of demand

A

When price rises, consumers respond by buying more

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12
Q

Extension of demand

A

When price falls, consumers respond by buying more

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13
Q

Contraction of demand

A

When price rises, consumers respond by buying less

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14
Q

Excess supply

A

When quantity supplied is greater than quantity demanded at that given price

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15
Q

Excess demand

A

When quantity demanded is greater than quantity supplied at that given price

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16
Q

Income effect

A

When the price of a good falls, it is like a small increase in REAL income

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17
Q

Substitution effect

A

When the price of a good falls, consumers will switch to buying this good, instead of buying the relatively more expensive alternate goods

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18
Q

The rationing function

A

When the price rises because of a left shift in the supply curve, those who moderately enjoy the good will cease buying the good

Only those who really benefit from consuming the good will continue to buy the good at the higher price

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19
Q

The signalling function

A

An increase in price, caused by a rise in demand, will signal to entrepreneurs to enter the market

A decrease in price, caused by a fall in demand, will signal to entrepreneurs to edit the marker

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20
Q

The law of diminishing marginal utility

A

The benefit from the next unit consumed is less than the benefit gained from the precious unit consumed

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21
Q

Consumer surplus

A

Consumer surplus is the difference between the highest price consumers are prepared to pay, and the price they actually pay

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22
Q

Producer surplus

A

The difference between the lowest price producers are prepared to sell for, and the actual price received

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23
Q

Community surplus

A

Community surplus = producer surplus + consumer surplus

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24
Q

The demand curve gradient

A

Negative \

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25
Q

What are two reasons why the demand curve slopes downwards

A

The income effect - when price falls, people can afford to buy more

The substitution effect - when price falls, people will substitute to buying that relatively cheap option

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26
Q

Extension of demand direction

A

Downwards

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27
Q

Contraction of demand direction

A

Upwards

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28
Q

What are factors that would increase the quantity demanded at any given price

A
  • a rise in income
  • a fall in income tax
  • a rise in the price of substitute goods
  • a fall in the price of complementary goods
  • increased advertising
  • the good comes into fashion
  • population size increases
  • and increase in the quality of the good
  • less regulations on buying the good
  • speculative buying
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29
Q

What factors would increase the quantity supplies of a good at any given price?

A
  • a fall in the cost of the raw materials
  • a fall in the cost of capital
  • a fall in the cost of labour
  • any other fall in the cost of inputs. E.g. rent
  • a technological breakthrough in the production process
  • subsidies increased or introduced
  • VAT is lowered
  • an improvement in the weather for agricultural goods
  • an increase in labour productivity, without an increase in wages
  • division of labour is introduced
  • De-regulation
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30
Q

If the supply curve shifts right,

A

The cost of production has fallen

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31
Q

Excess supply

A

Glut

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32
Q

Excess demand

A

Shortage

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33
Q

Why is the supply curve upward sloping?

A

Each unit of output is more difficult to produce than the previous unit

34
Q

Lower triangle

A

Producer surplus

35
Q

Higher triangle

A

Consumer surplus

36
Q

The price elasticity of demand value

A

Measures the responsiveness of quantity demanded to change in price

37
Q

The income elasticity of demand value

A

Measures the responsiveness of the quantity demanded to a change in income

38
Q

The cross-price elasticity of demand value

A

Measures the responsiveness of the quantity demanded of Good A to change in the price of good B

39
Q

The price elasticity of supply value

A

Measures the responsiveness of quantity supplied to a change in price

40
Q

Elastic demand

A

When a change in price leads to a more than proportional change in quantity demanded

41
Q

Inelastic demand

A

When ac change in price leads to a less than proportional change in quantity demanded

42
Q

Unitary-elastic demand

A

When a change in price leads to an equal proportional change in quantity demanded

43
Q

Inferior good

A

When income rises, quantity demanded decreases

44
Q

Normal good

A

When income rises, quantity demanded increases

45
Q

Normal good with income Inelastic demand

A

When a rise in income leads to a less than proportional increase in quantity demanded

46
Q

Normal good with income elastic demand

A

When a rise in income leads to a more than proportional increase in quantity demanded

47
Q

Substitute good / alternative good

A

When a price of one good rises, the quantity demanded of another good decreases

48
Q

Complementary good

A

When the price of one good rises, the quantity demanded of another good decreases

49
Q

Elastic supply

A

When a change in price leads to a more than proportional change in quantity supplied

50
Q

Inelastic supply

A

When a change is price leads to a less than proportional change in quantity supplied

51
Q

Total revenue formula

A

Total revenue = price x quantity sold

TR = P x Q

52
Q

% change formula

A

% change = new value - old value / old value x 100

53
Q

Price elasticity of demand (PED) =

A

%change in QD / %change in P

54
Q

Income elasticity of demand value (YED) =

A

%change in QD/ %change in income

55
Q

Cross-price elasticity of demand value =

A

%change in QD of good A / %change in P of good B

56
Q

Price elasticity of supply value =

A

%change in QS / %change in P

57
Q

Elastic demand values (PED)

A
  • infinity to -1
58
Q

Inelastic demand values (PED)

A

-1 to 0

59
Q

Inelastic supply values (PES)

A

0 to 1

60
Q

Elastic supply values (PES)

A

1 to infinity

61
Q

Inferior good YED values

A
  • infinity to 0
62
Q

Normal good YED values

A

0 to 1 ( and to infinity )

63
Q

Luxury good YED values

A

1 to infinity

64
Q

-0.6 cross-price elasticity of demand

A

Strong compliments

65
Q

-0.2 cross-price elasticity of demand

A

Weak complements

66
Q

0 cross-price elasticity of demand

A

Goods of no relation

67
Q

+0.2 cross-price elasticity of demand

A

Weak substitutes

68
Q

+ 0.6 cross-price elasticity of demand

A

Strong substitutes

69
Q

PED

A

Price elasticity of demand

70
Q

YED

A

Income elasticity of demand

71
Q

XED

A

Cross price elasticity of demand

72
Q

PES

A

Price elasticity of supply

73
Q

Why would the PED be inelastic?

A
  • Brand loyalty
  • a necessity
  • addictive
  • few close substitutes
  • forms a low percentage of income
  • peak-times for public transport
74
Q

What factors cause PED to be elastic

A
  • luxury, non-essential good
  • many close substitutes
  • weak brand loyalty
  • forms a high proportion of households income
75
Q

The PED value changes along

A

A straight line

76
Q

Lower part of P-Qd line

A

PED is inelastic

77
Q

Midpoint of P-Qd line

A

Unitary elastic PED

78
Q

High part of P-Qd line

A

Elastic PD

79
Q

What factors make the PES value inelastic

A
  • long production time
  • seasonal produce
  • volatile price
  • perishable
  • low stockpiles
  • the cost of storage is high
  • few available resources
  • firms operating at nearly full capacity
  • high legal barriers preventing new firms entering the market
  • high financial barriers preventing new firms entering the market
80
Q

What factors cause the PED to be elastic?

A
  • quick production time
  • production all year round
  • stable prices
  • non-perishable goods
  • cost of storage is low
  • large stockpiles
  • resources are easily available
  • few legal, marketing and financial barriers preventing new firms entering the market

Economics (5 decks)

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