Supply And Demand Flashcards
Factors Determining Elasticity Of Demand:
- Availability Of Substitutes
- Degree Of Necessity For The Good
- Time Period
- Proportion of in income that the good takes up
Factors Determining Elasticity Of Supply:
- Production Time (Short run we assume capital is fixed so firms can’t suddenly start producing more)
- Spare Capacity
- Pre-existing stock
- Availability Of Raw Materials
Examples of Goods With Elastic and Inelastic Demand:
Elastic - Airline Tickets
Inelastic - Petrol/Oil
Examples Of Goods with Elastic and Inelastic Supply:
Elastic - Manufactured Goods (can easily be stored)
Inelastic - Mineral Resources (difficult to identify and extract)
Cross Elasticity Of Demand
%🔼Qd(good A)/%🔼P(good B)
If XED > 1, The goods are substitutes
If XED < -1, The goods are compliments
Income Elasticity Of Demand
%Qd(good A)/%Income
If YED > 1, the good is a luxury good
If YED < 0, the good is an inferior good
If 0 < YED < 1, the good is a normal good
Third Degree Price Discrimination
Third-degree price discrimination is when a firm charges different prices to different consumer groups based on their differing price elasticities of demand, provided the groups can be clearly identified and markets kept separate to prevent resale.
Example - Train tickets
Advantages Of Price Discrimination
- Higher revenue and profits for firms:
Firms can increase total revenue by capturing more consumer surplus. By charging higher prices to inelastic consumers and lower prices to elastic ones, they can maximise profits compared to uniform pricing. - Greater output and economies of scale:
By serving elastic segments (e.g. students, off-peak users) at lower prices, the firm can expand output, potentially lowering average costs through economies of scale. - Can increase access to goods/services:
Lower-income or more price-sensitive groups can access goods they wouldn’t at a single higher price — e.g. student discounts, off-peak travel fares — improving allocative efficiency.
Disadvantages Of Price Discrimination
- Consumer surplus is transferred to the producer:
Price discrimination reduces consumer welfare for less elastic groups (e.g. charging business travellers more), as they pay more than under uniform pricing. - Risk of perceived unfairness:
Some consumers may view it as unfair or exploitative, especially if they are charged more for the same product (e.g. regional pricing of software or medicine). - Requires barriers to resale and sufficient market power:
It only works if arbitrage can be prevented, and the firm must have monopoly power. In competitive markets, firms cannot set different prices.
Great Advantage Of Price Discrimination (A* Gold Dust)
“Increased access to the good or service through lower prices for more elastic groups — such as students or low-income consumers — can have long-run positive externalities. For example, in the case of education or training, lower pricing may enable wider participation, which can help close skills gaps, improve human capital, and support long-run productivity growth in the economy.”
What causes movement along the demand and supply curve?
Changes in price cause extensions and contractions along the line
Factors causing a shift in the demand curve:
Income Changes - more income increases demand for normal/luxury goods
Consumer Tastes and Preferences - Cause consumers to enter/leave the market
Price Of Substitutes/Compliments
Expectations Of Future Prices
Population Size
Advertising/Branding
Factors causing a shift in the supply curve:
Changes in production costs
Technology Improvements
Weather/Natural Factors
Number of firms in the market
Expectations Of Future Prices
Taxes/Regulations
