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Business Economics > Supply And Demand > Flashcards

Supply And Demand Flashcards

1
Q

What is the production function?

A

Yt=f(Lt, Kt) At

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2
Q

What is production?

A

Production = Units of labour combined with units of capital, scaled up by units of technology

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3
Q

How is economic growth reflected in a graph?

A

The production possibility frontier moves outwards, reflecting an increase in productive capacity

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4
Q

How can we enable money prices to move to the correct level to enable trade?

A

The exchange rate and wages can be altered

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5
Q

What determines market dimension?

A

Location, price, quantity, time

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6
Q

What determines demand?

A

The products price, the price of alternative products, household incomes, consumer preferences

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7
Q

How is the market demand function expressed?

A

Dx= f(Px, Pn, I, Preferences)

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8
Q

What does a fall in prices of a product cause?

A

Demand goes up (substitution and income effect)

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9
Q

If incomes rise, how does that affect demand?

A

Demand rises if it is a normal good, and decreases if it is an inferior good (income effect)

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10
Q

If the price of an alternative product goes up, how does this affect demand for the original product?

A

Increases (substitution effect)

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11
Q

If the prices of a good increase, what happens to supply?

A

Increases (firms aim to sell goods at higher prices)

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12
Q

If the price of a substitute good falls, how does this affect demand for the original product?

A

Decreases (substitution effect)

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13
Q

What does market supply depend on?

A

The price at which products are sold, production costs and technology, the number of firms operating in the market

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14
Q

How is the supply function expressed?

A

Sx = f(Px, input costs, technology, no of firms)

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15
Q

If new firms enter the market, what happens to supply?

A

The supply curve shifts to the right; supply quantities increase, prices stay the same

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16
Q

What happens to supply if input costs rise?

A

The supply curve shifts to the left; quantities decrease and prices stay the same

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17
Q

What does the market equilibrium show?

A

The point at which demand and supply are in balance - the plans of consumers and producers are in balance.

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18
Q

What does it mean if the market is above the equilibrium?

A

There will be an excess of supply, and market prices fall

19
Q

What does it mean if the market is below the equilibrium?

A

There is a shortage - people are willing to buy more than the firm is willing to supply, and market prices rise

20
Q

What happens if there is an excess of demand in the market?

A

Prices rise to stimulate supply, causing demand to contract - creates new equilibrium.

21
Q

What happens if there is an excess of supply in the market?

A

Prices begin to fall, reducing supply and stimulating demand and creating a new equilibrium

22
Q

What is elasticity?

A

How much demand changes if there is a price change

23
Q

How is elasticity calculated?

A

% change in quantity demanded / % change in price

dQ/Q) / (dP/P) OR (dQ/dP) x (P/Q

24
Q

What are our productive resources?

A

Labour (L), Capital (K), Technology (A)

25
Q

Does elasticity go up or down if prices go up?

A

Goes up because quantities are going down

26
Q

What does it mean if a demand curve is steeper over a give. p/Q range?

A

It is more inelastic, but remember that this is relative

27
Q

What gradient does a perfectly inelastic demand curve have?

A

Vertical (no impact on demand)

28
Q

What is the gradient of a perfectly elastic demand curve?

A

Horizontal (no impact on quantity)

29
Q

Will demand be elastic or inelastic if there is a high availability of substitute goods?

A

Elastic (demand will be highly affected by price changes if there are plenty of competitor items)

30
Q

Will demand be price elastic or inelastic for necessities?

A

Inelastic - many people rely on these items unlike luxury goods, which are likely to be elastic

31
Q

How does market definition affect price elasticity?

A

The more widely it is defined, the more elastic prices will be. ( eg. Demand for food is more inelastic than the demand for a particular type of food)

32
Q

Will demand be elastic or inelastic in the long run?

A

Elastic - buyers have more time to find substitutes and alter behaviour than in the short term

33
Q

How do you calculate margins from demand curves?

A

If prices fall, the difference between the two numbers on the Y axis forms the revenue lost. The increase between the two numbers on the X axis forms the revenues gained

34
Q

What is cross priced elasticity?

A

The impact on demand arising from changes in the prices of other goods

35
Q

How do you work out the cross price elasticity of two goods?

A

% Change in the quantity of X / % change in the price of Y

36
Q

Is cross price elasticity positive or negative for substitute goods?

A

Positive - the rise in the price of Y leads consumers to switch to X

37
Q

Is the cross price elasticity for complementary goods positive or negative?

A

Negative - the rise in the price of Y leads to a fall in the demand for Y, and hence a fall in the demand for complementary good X (fortunes of one affect the other)

38
Q

What is the price elasticity of supply?

A

The responsiveness of supply to changes in price

39
Q

How do you work out supply elasticity?

A

% increase in quantity supplied / % increase in price

40
Q

What does inelastic supply mean?

A

Elasticity is less than 1 and any given % change in price rise leads to a smaller % change in quantity supplied

41
Q

What does elastic supply mean?

A

Elasticity is greater than 1 and any given % change in price leads to a large % change in quantity supplied

42
Q

What gradient does a perfectly inelastic supply curve have?

A

Vertical - any % change in price leaves the quantity supplied unchanged

43
Q

What gradient does a perfectly elastic supply curve have?

A

Horizontal - elasticity is infinite and firms can supply as much as people want to buy at a given price

Business Economics (8 decks)

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