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econ > Supply, demand, elasticity of markets > Flashcards

Supply, demand, elasticity of markets Flashcards

1
Q

define market

A

any place where transactions take place between buyers and sellers

EG. shares are traded in a stock market

scarcity MUST EXIST for a market to exist

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2
Q

define demand

A

demand is the willingness and the ability of customers to pay a certain price in a market to obtain a particular good or service
(want or willingness of a consumer/group of consumers to buy a good or service)

It is sometimes referred to as effective demand to distinguish it from a want or desire to buy something

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3
Q

what is the difference between quantity demanded and demand

A

demand refers to an entire demand curve

quantity demanded refers to a point on the demand curve

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4
Q

what does the law of demand state

A

the quantity demanded for a good or service falls as it price rises, ceteris paribus

Likewise, the quantity demanded rises at lower prices

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5
Q

what does a demand curve show

A

the inverse relationship between price and quantity demanded of a product

\ line- linear, negative gradient
y axis- price
x axis- quantity demanded

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6
Q

what are the 3 causes of the negative relationship between price and demand

A
  1. The income effect- as price falls, the real income of customers rises, i.e. they are able to buy more products at lower prices
  2. The substitution effect- as the price of a good or service falls, more customers are able to pay, so they are more likely to buy the product, ie. substitute it for alternative products that they might not have previously bought
  3. Diminishing marginal returns- as people consume more of a particular good or service, the utility (return or satisfaction) gained from the marginal unit declines, so customers only purchase more at a lower price
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7
Q

what does the market demand curve refer to

A

the sum of all individual demand for a product

it is found by adding up all individual demand at each price level

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8
Q

define substitute

A

products that compete to satisfy the same consumer demand, such as Coca Cola or Pepsi

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9
Q

define complement

A

a good or service that is in joint demand with another (eg. cars and petrol)

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10
Q

define normal goods

A

products for which demand rises as consumer incomes rise

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11
Q

define inferior goods

A

products for which demand tends to fall as consumers’ incomes rise

ie. customers switch to a superior (luxury) product as their income rises- for example canned food products vs fresh food products

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12
Q

acronym for non-price determinant of demand

A

HIS AGE

Habits, Fashion and Tastes
Income
Substitutes and Complements
Advertising
Government policies
Economy
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13
Q

how do changes in non-price factors affect the demand curve

A

it causes a shift in the demand curve

Increase in demand -> rightwards shift (more quantity demanded at all price levels)

Decrease in demand-> leftwards shift (less quantity demanded at all price levels)

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14
Q

effect of habits, fashion and tastes on demand

A

products that become fashionable cause an increase in demand

unfashionable items reduce the level of demand

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15
Q

effects of income on demand

A

higher levels of income mean that customers are able and willing to buy more goods and services

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16
Q

effects of substitutes and complements on demand

A

if the price of a product falls, then it is likely that the demand for the substitute product will also fall

If the price of a product increases, then the demand for its complementary good is likely to fall

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17
Q

effect of advertising on demand

A

marketing messages are used to inform, remind and persuade customers to buy a firm’s products

Advertising increases demand for products

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18
Q

effect of government policies on demand

A

rules and regulations such as the legal age to purchase certain products, laws to on where and how to use products may affect demand

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19
Q

effect of economy on demand

A

whether the country is in recession or boom has an impact on the spending patterns of the population

eg 2008 global financial crisis caused the demand for most goods and services around the world to decline

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20
Q

how would higher interest rates affect demand

A

it would increase demand for savings schemes but reduce the amount of money people want to borrow from banks, including mortgages for house purchases

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21
Q

how would price affect the demand curve

A

Rise in price- contraction of in the quantity demanded of a product (moves upwards, left)

Fall in price- expansion in the quantity demanded (moves downwards, right)

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22
Q

PRICE ELASTIC

A

Consumer demand for a product is
described as price elastic if a small change in its price
causes a larger proportionate demand response.

PED >1 demand is elastic
=1 d is unit elasticity
∞ = d is perfectly price elastic

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23
Q

PRICE ELASTICITY OF DEMAND

A

The responsiveness of consumer demand for a product to a change in its price.

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24
Q

PRICE ELASTICITY OF SUPPLY

A

The responsiveness of producer supply of a product to a change in its price

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25
Q

PRICE INELASTIC

A

Consumer demand for a product is described as price inelastic if a small change in its price causes a less than proportionate demand response.

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26
Q

PRICE MECHANISM

A

The market mechanism that guides decisions taken by different producers and consumers about how scarce resources should be allocated between competing uses.

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27
Q

Formula for PED

A

%∆Qd ÷ %∆P

%∆ = (Difference/ Original)100

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28
Q

PED is usually ____

A

negative because of the law of demand

Increase in price (+), decrease quantity demanded (-) -> neg. n (-)
Decrease in price (-), increase quantity demanded (+) -> neg. n (-)

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29
Q

PED= ∞

A

Demand is perfectly price elastic

Customers switch to buying other substitutes if firms increase their price
____ horizontal line

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30
Q

PED = 1

A

Demand is unit price elastic, given ∆P -> %Qd

curve with decreasing negative gradient

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31
Q

PED = 0

A

Demand is perfectly price inelastic -> regardless of the price, quantity demanded does not change
-> suggests there are no substitutes for the product

vertical straight line

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32
Q

PED < 1

A

Demand is inelastic

When the price changes, quantity demand will change proportionally less than change in price

eg. Price raises by 5%, quantity demanded decreases by 10% -10/25=0.4
%∆P> %∆Qd

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33
Q

PED > 1

A

Demand is price elastic

For any given price change, there is a greater proportionate change in quantity demand

eg. Price falls by 5% but quantity demanded goes up by 15%
%∆P< %∆Qd

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34
Q

Describe the changes in PED value for a downwards sloping linear demand curve

A

The value of PED increases as price level rises because customers are more responsive to changes in prices at higher levels (price now accounts for a greater proportion of consumer’s income)

The gradient of the linear demand curve will remain the same, but the %∆D is greater at higher price levels

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35
Q

if demand is ‘price elastic’ …?

A

the percentage fall in demand is greater than the percentage increase in price

Consumer demand for a product is
described as price elastic if a small change in its price
causes a larger proportionate demand response

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36
Q

what affects price elasticity of demand (acronym)

A

SPLAT

Substitutes
Percentage of income 
Luxury/Necessity
Addictive/habit forming
Time Period
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37
Q

how do substitutes affect PED

A

MORE SUBSTITUTES -> MORE PRICE ELASTICITY OF DEMAND

the greater the number, availability and price of close substitutes there are for a good or service, the higher the value of its PED will tend to be -> price elastic demand

Products with few substitutes (such as private education and prescribed medicine) have price inelastic demand

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38
Q

how does percentage of income affect PED

A

the GREATER PROPORTION of consumers’ income spent on a good or service, the more price ELASTIC demand will be, ceteris paribus

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39
Q

how does luxury/necessities affect PED

A

ESSENTIAL products (eg. fuel, housing, food) tend to be price INELASTIC as households will continue to purchase them even if price rises

demand for LUXURIES is relatively price ELASTIC

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40
Q

how do addictions and habits affect PED

A

if a product is habit forming or addictive it tends to be price INELASTIC

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41
Q

how does time period affect PED

A

SHORT RUN - INELASTIC

  • few substitutes available and consumers may not have as much time to look for alternatives
  • consumers need time to change their habits and preferences

LONG RUN- ELASTIC

  • more substitutes available
  • over time consumers can change their demand based on more permanent price changes by switching to alternative products
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42
Q

how would advertising and brand loyalty affect PED

A

effective advertising shifts demand curve outwards to the right but may reduce PED for the product

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43
Q

how would durability affect PED

A

more durable (eg. furniture or motor vehicles), more elastic its demand tends to be as there is no urgency to replace if their prices are high

44
Q

how would the costs of switching affect PED

A

if there are high costs for customers to switch between brands or products, demand tends to be price inelastic

eg. mobile phone subscribers are bound by lengthly contracts so switching between rival services is less easy

45
Q

how can firms use the knowledge of PED to increase their revenue

A

firms that face:

inelastic price demand can increase its prices to earn more total revenue

price elastic demand for products can reduce prices to earn more revenue

46
Q

why is the PED for many primary commodities low and the PED for many manufactured goods high

A

These commodities lack real substitutes and are essential products for output. Hence, their PED value is relatively low, i.e. price inelastic or unresponsive to changes in price. By contrast, the PED for manufactured
goods is relatively high because there are far more substitutes available for customers to choose from.

47
Q

if supply is elastic firms can _____ if there is an increase in the price of a product

such firms can ________

A

if supply is elastic firms can easily increase supply without a time delay if there is an increase in the price of a product

such firms can gain a competitive advantage

48
Q

PES > 1

A

supply is price elastic, responsive to changes in price

When the price rises from P1 to P2 there is PLENTY OF SPARE CAPACITY for the firm, so the quantity supplied can increase by a greater proportion from Q1 to Q2.

Eg. mass produced goods

positive linear slope, shallow gradient

49
Q

PES < 1

A

supply is inelastic, not responsive to changes in price

When the price rises form P1 to P2, there is very LITTLE SPARE CAPACITY for the firm, so the quantity supplied can only rise by a smaller proportion from Q1 to Q2

Eg. fresh fruit/veg that take time to grow

positive linear slope, steep gradient

50
Q

PES = 0

A

supply is perfectly price inelastic, change in price has NO IMPACT on quantity supplied, there is NO SPARE CAPACITY TO RAISE OUTPUT

irrespective of change in price, firm only supplies a maximum of Qe
eg. stadium that has a maximum seating capacity

51
Q

PES = 1

A

supply has unitary price elasticity, the percentage change in quantity supplied MATCHES the proportional change in price

supply curve starts at the origin, any curves that start at at the origin has a PES value =1

52
Q

PES= ∞

A

supply is perfectly price elastic

Due to the SPARE CAPACITY, quantity can increase from Q1 to Q2 irrespective of a price change

53
Q

What are the determinants of price elasticity of supply

A

TICS

                                             Time (period) 
                                             Inventory (level of stocks)                                 (degree of spare productive) Capacity
              (ease and cost of) Substitution (of factors                    
                production)
54
Q

effect of time period on PES

A

supply is price inelastic in the short run (eg. fresh fruit and veg dependant on harvest time)

long run- firms adjust their levels of production according to changes in the market

55
Q

effect of the level of stocks on PES

A

firm with high inventories have relatively price elastic supply -> MORE ABLE TO RESPOND QUICKLY TO A CHANGE IN MARKET PRICE

56
Q

effect of degree of spare productive capacity on PES

A

firm with plenty of spare capacity can increase supply with ease without increasing its costs of production, so supply is relatively ELASTIC

opposite applies in the long run

57
Q

effect of the ease and cost of factor substitution on PES

A

the easier it is to substitute factors of production, the more price elastic supply tends to be

the more mobile factors of production are, the greater the PES will be, ceteris paribus

58
Q

why is it beneficial for firms to have a high PES

A

they are highly responsive to changes in price and other market conditions giving them a competitive advantage

59
Q

compare the PES for primary sector products with manufactured products

A

PES for primary products low, takes comparatively long time to increase primary sector output
PES for manufactured products higher, can be mass-produced in shorter periods

60
Q

how can a company improve PES value

A
  • create spare capacity
  • keep large volumes of stocks (inventories)
  • improve storage systems to prolong the shelf-life of products
  • adopting or upgrading tot the latest tech
  • improving distribution systems (how the products get to the customers)
  • developing and training employees to improve labour occupational mobility (to perform a range of jobs)
61
Q

what is the key determinant of PES

A

the nature of barriers to entry eg. copyrights and patents reduces the number of potential firms in the industry which lowers the value of PES, ceteris paribus

62
Q

What does the law of supply state?

A

There is a positive relationship between quantity supplied of a product and its price, coteries paribus

63
Q

What are the reasons for the relationship between price and supply

A
  • existing firms in the market can earn higher profit margins if they supply more
  • more firms enter the market as higher prices allow them to cover production costs
64
Q

How does price affect the supply curve

A

There is a movement along the supply curve causing a change in the quantity supplied
The line looks like /

Contraction: fall in price causes contraction in quantity supplied, downwards to the left
Expansion: rise in price causes quantity supplied to expand, upwards to the right

65
Q

How do non-price factors affect the supply

A

It causes a shift of the supply curve causing a change in supply
• increase in supply -> rightwards shift
• decrease in supply -> leftwards shift

66
Q

What are the non-price determinants of supply

A

PINTS WC JECT

Productivity
Indirect Tax
No of firms
Technology 
Subsidy

Weather
Costs of Production

Joint supply
Expectations
Competitive supply
Time

67
Q

Effect of costs of production on supply

A

A reduction in costs of production will shift the supply curve to the right as producers are more willing and able to produce

68
Q

Effect of productivity on supply

A

If productivity, of for example capital or labour; output per worker per time period increases, they are producing more at the same wage

This reduces costs of production and shifts the curve to the right

69
Q

Effect of indirect tax on supply

A

Increase of indirect tax imposed on the supplier increases costs of production so they reduce market supply

70
Q

Effect of barriers to entry (n of firms) on supply

A

The number of firms in the market, determined by the nature of barriers to entry to the industry, can affect the level of supply

(The more firms that enter the market, the supply curve will shift to the right)

71
Q

Effect of technology on supply

A

Advances in technology mean that there can be greater levels of output at every price level

An improvement in tech reduces the costs of production and shifts a supply curve to the right

72
Q

Effect of subsidies on supply

A

Subsidies are financial assistance from the government to help encourage output by reducing the costs of production for products that are beneficial to society as a whole (eg. Healthcare, education)

If a subsidy is increased or given, supply curve shifts to the right since costs of production lowered

73
Q

Effects of weather on supply

A

The output of some products depends on the weather- for example agriculture output

Good weather will shift supply curve to the right

74
Q

Effect of joint supply on supply

A

The output of one product (such as cows) routinely leads to the supply of another (such as milk)

75
Q

Effect of expectations on supply

A

Price acts as a signal to producers to move their resources to the provision of products with greater profitability

The expectations of price movements affect supply

If a producer thinks they can make more profit on their product in the future, they’ll hold back supply now and supply more later on

76
Q

What happens to the supply for a product when the price increases?

A

Supply stays the same, but quantity supplied increases

Change in price ONLY affects quantity supplied

77
Q

Effect of competitive supply on supply

A

The output of a product (such as apples) takes place as an alternative to other products (such as oranges), based on the relative profitability of these products

78
Q

Effect of time on supply

A

Supply tends to be lower int he short run but can increase over time

  • eg. It is difficult for farmers to increase their supply of crops within a short period of time
79
Q

Equilibrium

A

Where demand = supply in a market

Intersection of supply and demand curves

The point where the market is clear from excess demand and excess supply

80
Q

Disequilibrium

A

Demand does not equal supply
Eg. The price is above P1 (excess supply) or below P1 (excess demand)

“A market outcome, in terms
of price and total quantity traded, which is unstable
and liable to change because market demand and
market supply are not in balance, i.e. there is excess
demand or excess supply.”

81
Q

What happens to disequilibrium in a free market

A

In a free market disequilibrium will never last because the of the price mechanism which takes away problems that exist in the form of excess supply or demand.

82
Q

4 functions of of price mechanism

A 
ARSI
Allocates scarce resources efficiently and effectively 
Rations excess demand/supply
Signals price too high/ too low 
Incentives to change to change price
83
Q

market price

A

The equilibrium price for a product in a market, determined where market demand exactly matches market supply.

84
Q

PLANNED ECONOMIC SYSTEM

A

An economic system in which the government determines what goods and services to produce, their prices and how they are allocated.

85
Q

MARKET ECONOMIC SYSTEM

A

An economic system in which decisions about how resources are used, what goods and services they produce and how they are allocated, are taken by private sector firms and consumers.

86
Q

LABOUR MOBILITY

A

The ease with which workers can move between different occupations or jobs.

87
Q

LABOUR PRODUCTIVITY .

A

The average output or revenue per worker per period of time

88
Q

LAND

A

Natural resources used in the production of goods and services.

89
Q

CAPITAL GOODS

A

Human-made resources that do not satisfy an immediate consumer want because they are to be used in the production of other goods and services.

90
Q

FACTOR REWARDS

A

Payments received by the owners of factors of production for use of their services in production. They include wages (labour), rent (land), interest (capital) and profits (enterprise).

91
Q

FACTOR MOBILITY

A

The ability or ease with which factors of production can be moved or reallocated between different productive uses without incurring significant costs or a loss of output

92
Q

FACTOR SUBSTITUTION

A

Replacing one factor of production with another in a production process, for example, to make production more capital intensive.

93
Q

FACTORS OF PRODUCTION

A

Scarce resources (land,
labour and capital) used in the production of
goods and services to satisfy consumer needs and
wants.

94
Q

LABOUR

A

Human effort used in the production of goods and services.

95
Q

ENTERPRISE

A

The skills and willingness to take the risks required to organize productive activity in a firm.

96
Q

ENTREPRENEUR

A

A person with enterprise and the willingness to take the risks and decisions necessary to organize scarce resources into firms to produce goods and services.

97
Q

EXCESS DEMAND

A

When the market demand for a product exceeds its market supply so there is upward
pressure on its market price.

98
Q

EXCESS SUPPLY

A

When the market supply of a product
exceeds market demand so there is downward
pressure on its market price.

99
Q

what is the key determinant of PED

A

the key determinant of the value of PED for a good or service is the degree of substitution- the extent to which consumers have access to close alternatives for the product

100
Q

how can governments use PED

A

to determine taxation policies: eg. imposing heavy taxes on demerit goods such as cigarettes knowing demand for these products is inelastic

101
Q

how can firms with different PED values apply this knowledge

A

use price discrimination to charge different customers different prices for the same product

eg. theme parks charge adults higher prices and offer discounts for children and families to increase revenue

102
Q

how will firms benefit if the PED for their firm’s exports is price elastic

A

it will generally benefit from lower exchange rates

as export prices fall, so the firm becomes more price competitive

103
Q

firms can ____ on most of the ____ ____ on products that are highly price inelastic eg. ___

A

firms can pass on most of the incidence on indirect taxes on products that are highly price inelastic eg. alcohol, tobacco, petrol

104
Q

Why is PES important for consumers

A

The price elasticity, the ability to charge more entices the producers to produce more. But at some on time, they reach a production output and capability that he can now reduce costs because they are more efficient and produce more which benefits the consumers.

105
Q

Why is PED important for consumers

A

If a firm increases the price of its products consumers will change their demand for other substitutes. At some point the producers will improve their productivity such that they can lower the price so consumers are more willing and able to purchase them

econ (2 decks)

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