Supply and Demand Flashcards
Supply
the quantity supplied at certain prices; different than quantity
Demand
attitude of those in the market buying
Firm
business or organization (owned by an individual)
Factor Markets
the exchange of inputs we produce
Product markets
the exchange of goods and services
Market power
a condition in which an individual or firm has an unfair advantage (decreases efficiency)
Equal access to information
limits market power
Pareto Optimality
a situation where there is no way to make someone better off without making someone worse off (highest efficiency)
Elasticity
amount that demand responds to market conditions
Inelastic
insignificant change in demand regardless of market conditions
Necessity
a good for which there are no substitutes; more inelastic; e.g healthcare, gasoline
Luxury
more elastic
Factors that determine inelasticity
- Necessity vs. luxury
- Price and quantity of available substitutes
- Time frame
- Price relative to wealth and income
Measuring elasticity ϵ = % of quantity change
% of price change
ϵ<1 then inelastic
ϵ>1 then elastic
ϵ=0 then perfectly inelastic
ϵ= 1 then unitary elasticity
Unitary elasticity
percentage change in quantity and price are equal
Total revenue
price X quantity
Price sensitive
significantly elastic demand in which demand is more dependent on price
Shift variables
factors that alter changes in demand
Price of related goods
a variable that is impacted by complements and substitutes (related goods)
Complements
items that are often consumed together (e.g. french fries & ketchup)
Substitutes
goods that can replace the utility of another good (e.g. Pepsi & Coke)
Cross price elasticity
how much a quantity demand change in one good impacts the price of another good Demand line shifts
income elasticity (of demand)
how much the quantity demanded of a good of services changes as a result of income
Normal goods
any good in which demand increases as income increases
Inferior goods
any good in which demand decreases as income increases
market demand
sum of the individual demands for a product from buyers in the market
Entry & exit shifts in demand
changes in demand as people enter or exit a market; demographics of a market are important; these are often age-specific factors of a good or service
