Supply And Demand Flashcards
What is the production function?
Yt=f(Lt, Kt) At
What is production?
Production = Units of labour combined with units of capital, scaled up by units of technology
How is economic growth reflected in a graph?
The production possibility frontier moves outwards, reflecting an increase in productive capacity
How can we enable money prices to move to the correct level to enable trade?
The exchange rate and wages can be altered
What determines market dimension?
Location, price, quantity, time
What determines demand?
The products price, the price of alternative products, household incomes, consumer preferences
How is the market demand function expressed?
Dx= f(Px, Pn, I, Preferences)
What does a fall in prices of a product cause?
Demand goes up (substitution and income effect)
If incomes rise, how does that affect demand?
Demand rises if it is a normal good, and decreases if it is an inferior good (income effect)
If the price of an alternative product goes up, how does this affect demand for the original product?
Increases (substitution effect)
If the prices of a good increase, what happens to supply?
Increases (firms aim to sell goods at higher prices)
If the price of a substitute good falls, how does this affect demand for the original product?
Decreases (substitution effect)
What does market supply depend on?
The price at which products are sold, production costs and technology, the number of firms operating in the market
How is the supply function expressed?
Sx = f(Px, input costs, technology, no of firms)
If new firms enter the market, what happens to supply?
The supply curve shifts to the right; supply quantities increase, prices stay the same
What happens to supply if input costs rise?
The supply curve shifts to the left; quantities decrease and prices stay the same
What does the market equilibrium show?
The point at which demand and supply are in balance - the plans of consumers and producers are in balance.
What does it mean if the market is above the equilibrium?
There will be an excess of supply, and market prices fall
What does it mean if the market is below the equilibrium?
There is a shortage - people are willing to buy more than the firm is willing to supply, and market prices rise
What happens if there is an excess of demand in the market?
Prices rise to stimulate supply, causing demand to contract - creates new equilibrium.
What happens if there is an excess of supply in the market?
Prices begin to fall, reducing supply and stimulating demand and creating a new equilibrium
What is elasticity?
How much demand changes if there is a price change
How is elasticity calculated?
% change in quantity demanded / % change in price
dQ/Q) / (dP/P) OR (dQ/dP) x (P/Q
What are our productive resources?
Labour (L), Capital (K), Technology (A)
Does elasticity go up or down if prices go up?
Goes up because quantities are going down
What does it mean if a demand curve is steeper over a give. p/Q range?
It is more inelastic, but remember that this is relative
What gradient does a perfectly inelastic demand curve have?
Vertical (no impact on demand)
What is the gradient of a perfectly elastic demand curve?
Horizontal (no impact on quantity)
Will demand be elastic or inelastic if there is a high availability of substitute goods?
Elastic (demand will be highly affected by price changes if there are plenty of competitor items)
Will demand be price elastic or inelastic for necessities?
Inelastic - many people rely on these items unlike luxury goods, which are likely to be elastic
How does market definition affect price elasticity?
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)
Will demand be elastic or inelastic in the long run?
Elastic - buyers have more time to find substitutes and alter behaviour than in the short term
How do you calculate margins from demand curves?
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
What is cross priced elasticity?
The impact on demand arising from changes in the prices of other goods
How do you work out the cross price elasticity of two goods?
% Change in the quantity of X / % change in the price of Y
Is cross price elasticity positive or negative for substitute goods?
Positive - the rise in the price of Y leads consumers to switch to X
Is the cross price elasticity for complementary goods positive or negative?
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)
What is the price elasticity of supply?
The responsiveness of supply to changes in price
How do you work out supply elasticity?
% increase in quantity supplied / % increase in price
What does inelastic supply mean?
Elasticity is less than 1 and any given % change in price rise leads to a smaller % change in quantity supplied
What does elastic supply mean?
Elasticity is greater than 1 and any given % change in price leads to a large % change in quantity supplied
What gradient does a perfectly inelastic supply curve have?
Vertical - any % change in price leaves the quantity supplied unchanged
What gradient does a perfectly elastic supply curve have?
Horizontal - elasticity is infinite and firms can supply as much as people want to buy at a given price
