Supply and Demand Flashcards
Law of Demand
As the price of a good/service rises there is a decrease in the quantity demanded.
Define demand
The amount of a good or service that buyers are willing and able to purchase at a given price.
Non-price determinants of demand
1) Change in income
2) Consumer preferences
3) Prices of substitute and complement goods
4) Demographic changes
What causes a move along the demand curve?
Change in the price of the good or service.
What causes a shift of the demand curve?
Change in a non-price determinant of demand.
Law of Supply
As the price of a good/service increases, the amount firms choose to supply increases.
Define supply
The quantity of a good or service that firms choose to produce at a given price.
Non-price determinants of supply
1) Costs of factors of production
2) Technology
3) Price of jointly or competitively supplied goods
4) Expectations about future prices
5) Indirect taxes
6) Subsidies
7) The number of firms
What causes a move along the supply curve?
A change in the price of the good/service
What causes a shift of the supply curve?
A change in a non-price determinant of supply
When is the market be at equilibrium?
When quantity demanded equals quantity supplied
Define Price Elasticity of Demand
PED is the responsiveness of the quantity demanded to a change in price. Percentage change in quantity demanded for a 1% change in price.
Determinants of PED
1) Number and closeness of substitutes
2) Degree of necessity
3) Time period being considered
4) Proportion of income spent on the good
What is the value of PED when demand is (perfectly) elastic, unit elastic and (perfectly) inelastic?
Perfectly elastic - infinite Elastic >1 Unit elastic = 1 Inelastic <1 Perfectly inelastic =0
Define the cross-price elasticity of demand
The responsiveness of quantity demanded of a product to changes in the price of a related product (substitute of complement good/service)
