Supply and demand Flashcards
Price elasticity demand
The responsiveness of demand to a change in price
PED calculation
=%triQd/%trip
Price elasticity of supply
The responsiveness of supply to a change in price
PES calculation
=%priQs/%trip
Consumer surplus
willingness to pay-price
marginal benefit-price
Producer surplus
Price-willingness to sell
Market shock analysis
7 steps
1. describe in own words
2. supply or demand
3. increase or decrease
4. left or right.
5. market forces of supply and demand put pressure on price and quantity to adjust to new equilibrium.
6. expansion or contraction.
7. Describe new equilibrium.
Law of supply
states that as price increases then supply increases and vice-versa.
Law of demand
states that as price increases demand decreases and vice-versa.
Normal goods
goods you buy more of the richer you get and vice-versa.
Inferior goods
goods you buy more of the poorer you get and vice-versa
Substitution effect
change in demand from one good to another given an increase in price.
income effect
the increase in price of a good due to the supply-demand model making you poorer.
Giffen goods
inferior goods with an income effect stronger than the substitution effect. Slope will be positive.
Practicalities of equilibrium price
- structurally it is the only point where quantity supplied matches quantity demanded.
- market dynamics the market will return to equilibrium price level if it deviates.
