the price system and the microeconomy Flashcards
demand
the willingness and ability of buyers to purchase a good or service
factors affecting demand
- population
- advertising
- substitutes
- income
- fashion/taste
- income tax
- complementary
supply
the willingness and ability to sell a product at any price level
factors affecting supply
- cost of production
- subsidies
- weather
- indirect tax
- fashion
- technology
PED
responsiveness of quantity demanded for a product following a chance in price for the product
- PED > 1 (elastic)
- PED < 1 (inelastic)
PED formula
% change in quantity demanded / % change in price
- elastic: % change in Qd > % change in price
- inelastic: % change in Qd < % change in price
PED perfectly inelastic
where a change in price has no effect on quantity demanded
PED perfectly elastic
where all that is produced is sold at a given price
Unit elasticity
where the change in price is relatively the same as the change in quantity demanded
factors affecting PED
substitutes:
lots of substitutes -> can switch easily = elastic
no/few substitutes -> cannot switch from one good to another = inelastic
proportion of income:
consumers spend large proportion of income = elastic
consumers spend small proportion of income = inelastic
degree of necessity:
essential goods = inelastic
not essential = elastic
time:
short-term -> unable to find alternative goods = inelastic
long-term -> search for alternative goods = elastic
degree of brand loyalty:
- high degree of brand loyalty = inelastic
- low degree of brand loyalty = elastic
businesses uses of PED
- pricing strategy
- sales forecasting
-market segementation - product development (high elasticity can add value)
limitations of PED
- using historical data
- assumes ceteris paribus
- hard to obtain data
- time horizon- short term can be inelastic as no alternatives
YED definition
responsiveness of quantity demanded for a product following a change in incomeYED formula
YED formula
% change in quantity demanded / % change in income
- elastic: % change in Qd > % change in income
- inelastic: % change in Qd< % change in income
factors affecting YED
normal goods: higher demand when higher income
inferior goods: lower demand when income increases
necessity goods: for survival
luxury goods: when income increases, demand increases
business uses of YED
- market segementation by income levels
- sales forecasting
- pricing strategies
- investment decisions
limitations of YED
- value changes all the time
- some people may have different views on same good
- inaccurate data for income
XED definition
responsiveness of the quantity demanded for one product following a change in the price of another product
XED formula
% change in quantity demanded of good X / % change in price of good Y
XED values
- positive XED: substitutes goods (elastic)
- negative XED: complementary goods (inelastic)
business uses of XED
- pricing strategy for substitues
- market analysis- how change in demand can affect demand for others
- product development- can sell complementary together
limitations of XED
- difficult to calculate as price changes all the time
- substitutes can be strong or weak depending on person attributes
- technological advancements may affect complementary goods
- other variables may be important- brand loyalty/promotions
- cost structure may not be easily changed
- assumes ceteris paribus
PES definition
responsiveness of quantity supplied to a change in the price of a product
PES formula
% change in quantity supplied / % change in price
