Supply, demand, elasticity of markets Flashcards
define market
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
define demand
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
what is the difference between quantity demanded and demand
demand refers to an entire demand curve
quantity demanded refers to a point on the demand curve
what does the law of demand state
the quantity demanded for a good or service falls as it price rises, ceteris paribus
Likewise, the quantity demanded rises at lower prices
what does a demand curve show
the inverse relationship between price and quantity demanded of a product
\ line- linear, negative gradient
y axis- price
x axis- quantity demanded
what are the 3 causes of the negative relationship between price and demand
- The income effect- as price falls, the real income of customers rises, i.e. they are able to buy more products at lower prices
- 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
- 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
what does the market demand curve refer to
the sum of all individual demand for a product
it is found by adding up all individual demand at each price level
define substitute
products that compete to satisfy the same consumer demand, such as Coca Cola or Pepsi
define complement
a good or service that is in joint demand with another (eg. cars and petrol)
define normal goods
products for which demand rises as consumer incomes rise
define inferior goods
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
acronym for non-price determinant of demand
HIS AGE
Habits, Fashion and Tastes Income Substitutes and Complements Advertising Government policies Economy
how do changes in non-price factors affect the demand curve
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)
effect of habits, fashion and tastes on demand
products that become fashionable cause an increase in demand
unfashionable items reduce the level of demand
effects of income on demand
higher levels of income mean that customers are able and willing to buy more goods and services
effects of substitutes and complements on demand
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
effect of advertising on demand
marketing messages are used to inform, remind and persuade customers to buy a firm’s products
Advertising increases demand for products
effect of government policies on demand
rules and regulations such as the legal age to purchase certain products, laws to on where and how to use products may affect demand
effect of economy on demand
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
how would higher interest rates affect demand
it would increase demand for savings schemes but reduce the amount of money people want to borrow from banks, including mortgages for house purchases
how would price affect the demand curve
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)
PRICE ELASTIC
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
PRICE ELASTICITY OF DEMAND
The responsiveness of consumer demand for a product to a change in its price.
PRICE ELASTICITY OF SUPPLY
The responsiveness of producer supply of a product to a change in its price