Supply And Demand Flashcards
Shortage
Excess demand - more is trying to be bought than is produced
What does a shortage do?
- 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
Unitary elastic demand
When a change in price leads to equal proportional change in demand
- e.g. P increases by 5%, Qd decreases by 5%
What does the supply curve show?
The cost of producing each item
Marginal cost of production increases as
Output increases
Supply curve gradient
Positive
The demand curve shows
The total quantity bought at any given price
Extension of supply
When the price rises, firms respond by increasing output
Contraction of supply
When the price falls, firms respond by resuming output
Extension of demand
When price falls, consumers respond by buying more
Contraction of demand
When price rises, consumers respond by buying more
Extension of demand
When price falls, consumers respond by buying more
Contraction of demand
When price rises, consumers respond by buying less
Excess supply
When quantity supplied is greater than quantity demanded at that given price
Excess demand
When quantity demanded is greater than quantity supplied at that given price
Income effect
When the price of a good falls, it is like a small increase in REAL income
Substitution effect
When the price of a good falls, consumers will switch to buying this good, instead of buying the relatively more expensive alternate goods
The rationing function
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
The signalling function
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
The law of diminishing marginal utility
The benefit from the next unit consumed is less than the benefit gained from the precious unit consumed
Consumer surplus
Consumer surplus is the difference between the highest price consumers are prepared to pay, and the price they actually pay
Producer surplus
The difference between the lowest price producers are prepared to sell for, and the actual price received
Community surplus
Community surplus = producer surplus + consumer surplus
The demand curve gradient
Negative \
What are two reasons why the demand curve slopes downwards
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
Extension of demand direction
Downwards
Contraction of demand direction
Upwards
What are factors that would increase the quantity demanded at any given price
- 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
What factors would increase the quantity supplies of a good at any given price?
- 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
If the supply curve shifts right,
The cost of production has fallen
Excess supply
Glut
Excess demand
Shortage
Why is the supply curve upward sloping?
Each unit of output is more difficult to produce than the previous unit
Lower triangle
Producer surplus
Higher triangle
Consumer surplus
The price elasticity of demand value
Measures the responsiveness of quantity demanded to change in price
The income elasticity of demand value
Measures the responsiveness of the quantity demanded to a change in income
The cross-price elasticity of demand value
Measures the responsiveness of the quantity demanded of Good A to change in the price of good B
The price elasticity of supply value
Measures the responsiveness of quantity supplied to a change in price
Elastic demand
When a change in price leads to a more than proportional change in quantity demanded
Inelastic demand
When ac change in price leads to a less than proportional change in quantity demanded
Unitary-elastic demand
When a change in price leads to an equal proportional change in quantity demanded
Inferior good
When income rises, quantity demanded decreases
Normal good
When income rises, quantity demanded increases
Normal good with income Inelastic demand
When a rise in income leads to a less than proportional increase in quantity demanded
Normal good with income elastic demand
When a rise in income leads to a more than proportional increase in quantity demanded
Substitute good / alternative good
When a price of one good rises, the quantity demanded of another good decreases
Complementary good
When the price of one good rises, the quantity demanded of another good decreases
Elastic supply
When a change in price leads to a more than proportional change in quantity supplied
Inelastic supply
When a change is price leads to a less than proportional change in quantity supplied
Total revenue formula
Total revenue = price x quantity sold
TR = P x Q
% change formula
% change = new value - old value / old value x 100
Price elasticity of demand (PED) =
%change in QD / %change in P
Income elasticity of demand value (YED) =
%change in QD/ %change in income
Cross-price elasticity of demand value =
%change in QD of good A / %change in P of good B
Price elasticity of supply value =
%change in QS / %change in P
Elastic demand values (PED)
- infinity to -1
Inelastic demand values (PED)
-1 to 0
Inelastic supply values (PES)
0 to 1
Elastic supply values (PES)
1 to infinity
Inferior good YED values
- infinity to 0
Normal good YED values
0 to 1 ( and to infinity )
Luxury good YED values
1 to infinity
-0.6 cross-price elasticity of demand
Strong compliments
-0.2 cross-price elasticity of demand
Weak complements
0 cross-price elasticity of demand
Goods of no relation
+0.2 cross-price elasticity of demand
Weak substitutes
+ 0.6 cross-price elasticity of demand
Strong substitutes
PED
Price elasticity of demand
YED
Income elasticity of demand
XED
Cross price elasticity of demand
PES
Price elasticity of supply
Why would the PED be inelastic?
- Brand loyalty
- a necessity
- addictive
- few close substitutes
- forms a low percentage of income
- peak-times for public transport
What factors cause PED to be elastic
- luxury, non-essential good
- many close substitutes
- weak brand loyalty
- forms a high proportion of households income
The PED value changes along
A straight line
Lower part of P-Qd line
PED is inelastic
Midpoint of P-Qd line
Unitary elastic PED
High part of P-Qd line
Elastic PD
What factors make the PES value inelastic
- 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
What factors cause the PED to be elastic?
- 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
