Supply, Demand, Markets & Elasticity- MM Flashcards
What is demand?
The amount of a product that consumers are willing and able to buy at a certain price over a given time period
What is price?
The amount of money a business receives for selling each individual good or service
What is quantity demanded?
Total amount of a good or service that consumers demand over a period of time (price, quantity and time period needed)
What is individual demand?
The quantity of a good or service demanded by one individual at different prices, given income and other prices
What is market demand?
The total quantity of a good demanded by all individuals at each price
What is the income effect?
Lower prices increase purchasing power
What is the substitution effect?
Consumers substitute expensive goods for the cheaper goods
What is cost?
The amount of money a business pays when it buys something
What is the law of demand?
Assuming Ceterus paribus, the higher the price, the lower the demand
What are 5 possible determinants of demand?
1) A change in income (RDI)
2) A change in the price of other goods (substitutes and complements)
3) A change in tastes and fashion
4)Advertisements
5) Season and Weather
When a demand graph shifts 1) left and 2) right what is happening to the demand?
1) Decrease
2) Increase
Three types of demand?
1) Derived demand (a good or FOP is demanded for something else)
2) Composite demand (good which is demanded for multiple uses)
3) Joint demand (goods bought together)
What are 5 factors affecting tastes and fashions?
1) Quality
2) Advertisements
3) Weather
4) Expectations of future price rises
5) Change in circumstances
What is the rule of supply?
As price increases, so does supply (profit wanted)
What are 5 determinants of supply?
1) A change in cost of making the product
2) A change in availability of resources
3) A change in tax or subsidies
4) A change in technology
5) A change in price of products in competitive or joint supply
What is equilibrium?
Where demand=supply
What is consumer surplus?
Extra amount a consumer is willing to pay, but doesn’t
Increases as price decreases
Where are consumer and producer surplus on a S&D graph?
Producer surplus= Below p(n), to S1 origin, to equilibrium
Consumer surplus= Above p(n), to D1 origin, to equilibrium
What is producer surplus?
What producers are willing and able to supply a good for and the price they actually receive
Higher the price, greater the producer surplus
What is elasticity?
Measures the responsiveness of quantity demanded/supplied to a change in price or other key variables (income, price of substitutes/compliments)
What are the 4 types of elasticity?
1) Price elasticity of Demand (PeD)
2) Price elasticity of Supply (PeS)
3) Cross elasticity of Demand (XeD)
4) Income elasticity of Demand (YeD)
What are the formulas for elasticity?
% change in QD/QS ÷ % change in key variable (price, RDI etc)
What determines whether it is elastic or inelastic?
If the number (no sign) is bigger than 1
What is the normal result for PeD?
Negative number
What is the expected result for YeD, and what is it if it is negative?
Positive number, if negative it’s an inferior good
What is an inferior good?
A good that increases in demand when RDI falls
What is the expected answer for PeS?
Positive number
For XeD, why is the sign important?
Determines whether it’s a compliment or substitute good
For XeD, if the answer is 1) Positive and 2) Negative, what type of good are they?
1) Substitute
2) Compliment
What does an elastic demand curve look like?
Flat D curve
What does an inelastic demand curve look like?
Steep D curve
What does an elastic supply curve look like?
Flat S curve
What does an inelastic supply curve look like?
Steep S curve
What does a 1) positive and 2) negative Elastic YeD change look like?
1) Big shift right
2) Big shift left
What does a 1) positive and 2) negative Inelastic YeD change look like?
1) Small shift right
2) Small shift left
Where is total revenue on a D curve?
P1 x Q1
If demand is price elastic, how do TR and price interact?
Increased price reduces TR & Reduced prices increases TR
(Opposite directions)
if demand is price inelastic, how do TR and price interact?
Increased price increases TR & Reduced prices reduces TR
(Same direction)
What is PeD?
The responsiveness of quantity demanded to a change in price of that product
What is YeD?
The responsiveness of quantity demanded for a product due to a change in the level of RDI in the economy
What is PeS?
The responsiveness of quantity supplied to a change in price of that product
What is XeD?
The responsiveness of quantity demanded due to a change in the price of another product
What are 5 influences on PeD?
1) Substitutability (more substitutes= elastic)
2) Luxury (elastic) or necessity (inelastic)
3) Addictive products (inelastic)
4) Branded goods (inelastic)
5) Time (over time services become elastic)
What are 4 influences on PeS?
1) Time (long term= elastic)
2) Mobility of FOP
3) Availability in storage facilities (more= elastic)
4) Nature of the goods (natural= inelastic in short term)
What are 2 influences on YeD?
1) The nature of the good
-Luxury goods (elastic)
-Necessities (inelastic)
2) Basic items/ services
What does XeD depend on?
The relationship between the goods
