Supply & demand (2) Flashcards
Price Elasticity of Demand (PED)
The responsiveness of quantity demanded to a change in price.
Elastic Demand
Where quantity demanded changes by a larger percentage than price, with a value greater than 1 (ignoring the negative sign).
Inelastic Demand
Where quantity demanded changes by a smaller percentage than price, with a value less than 1 (ignoring the negative sign).
Unit Elasticity of Demand
Where quantity demanded changes by the same percentage as price, with a value equal to 1 (ignoring the negative sign).
Total Revenue (TR)
The total amount received by firms from the sale of a product, calculated as TR = P x Q.
Arc Elasticity
The measurement of elasticity between two points on a curve.
Point Elasticity
The measurement of elasticity at a point on a curve, using the formula dQ/dP × P/Q.
Sign and Value of PED
PED values are typically negative. é > 1 indicates elastic demand, é < 1 indicates inelastic demand, and é = 1 indicates unit elasticity.
Determinants of PED
- Number and closeness of substitute goods. 2. Proportion of income spent on the good. 3. Time period after a price change.
Implication of PED for Total Revenue
Elastic demand (E>1) means TR decreases as P rises and increases as P falls. Inelastic demand (E<1) means TR increases as P rises and decreases as P falls.
Price Elasticity of Supply (PES)
The responsiveness of quantity supplied to a change in price.
Income Elasticity of Demand (IED)
The responsiveness of quantity demanded to a change in consumer income.
Cross-Price Elasticity of Demand (CPED)
The responsiveness of demand for one good to a change in the price of another good.
Normal Goods
Goods whose demand increases as consumer incomes increase, with a positive income elasticity of demand.
Inferior Goods
Goods whose demand decreases as consumer incomes increase, with a negative income elasticity of demand.
Speculation
Buying or selling decisions based on anticipations of future prices.
Self-Fulfilling Speculation
When the actions of speculators cause the anticipated effect on prices.
Futures or Forward Market
A market for contracts to buy or sell at a future date at a price agreed today.
Short Selling (or Shorting)
Borrowing an asset to sell it, then buying it back later at a lower price to make a profit.
Future Price vs Spot Price
Future price is agreed upon today for future exchange, while spot price is the current market price.
Minimum Price (or ‘Floor’)
A government-set price level that cannot fall below a certain point.
Maximum Price (or ‘Ceiling’)
A government-set price level that cannot rise above a certain point.
Indirect Tax
A tax on expenditure on goods, paid indirectly by consumers via sellers.
Specific Tax vs Ad Valorem Tax
Specific tax is a fixed sum per unit sold, while ad valorem tax is a percentage of the price of the good.
