Theme 1: How do Markets Work Flashcards
What is demand?
When people are willing and able to buy a good/service
Describe the relationship between the price and quantity demanded
Quantity demanded increases when price goes down
What do all demand curves have in common?
They all slope downwards
Draw a demand curve
What is a contraction in demand?
When price increases and quantity demanded decreases
What is an extension in demand?
When price decreases but the quantity demanded increases
What is PED?
PED measures how much quantity demanded will respond to a change in price
What is the PED equation
% change in quantity demanded increases / % change in price
Why would PED be negative
Because there is an negative relationship between price and quantity demanded
What makes demand elastic?
If its larger than 1
What makes demand inelastic?
If its smaller than 1
What is the term for saying PED = -1
Unitary elastic
Draw an elastic demand curve
Draw an inelastic demand curve
How would consumers react to a price change in the inelastic demand?
They would be less responsive to the change
Draw a perfectly inelastic curve
How would consumers react to a price change in an elastic demand?
They would be more responsive to the changes in price
Draw a perfectly elastic curve
Draw a unitary elastic demand curve
What are the 6 factors which influence PED
1) necessity
2) addiction & habit
3) availability of substitutes
4) brand loyalty
5) proportion of income
6) time period
What is a luxury good?
Something that we don’t need but its nice to own it
What would be a PED of a necessity good
Inelastic
What would be a PED of a luxury good
Elastic
What would an addictive good’s PED be?
Inelastic
What would be a non-addictive good’s PED?
Elastic
What is a substitute good?
A good which can replace another good
How would the availability of substitutes effect a PED?
If there are less substitutes = inelastic
If there are more substitutes = elastic
How does brand loyalty affect the PED?
More brand loyalty = inelastic
Less brand loyalty = elastic
How does a proportion of income affect PED?
Large proportion = elastic
Small proportion = inelastic
How does time affect PED?
Short run = inelastic
Long run = elastic
What is total revenue formula?
Price x quantity
What would total revenue look like in an elastic demand curve if price increases?
If price increases, quantity will decrease by a larger %, so overall total revenue will decrease
What would total revenue look like in an inelastic demand curve if price increases?
If price increases, quantity will decrease but by a smaller %, so overall total revenue will increase
What would total revenue look like in a unitary elastic curve if price increases?
Total revenue wont change at all
What are the factors which affect demand?
1) advertising
2) fashion and trends
3) population and age structure
4) seasons
5) income
6) price of other goods
What is YED?
YED measures how much quantity demanded will respond to a change in income
What is the YED equation?
% change in quantity demanded / % change in income
Why is income elasticity demand important to a business?
It helps them understand how consumers will change their spending during recessions
What do you call when the YED of a good is negative
Inferior goods
What do you call when a YED of a good is positive?
Normal good
What is XED?
XED measures how the quantity demanded of good A will respond to a change in price of another good B
How does cross elasticity of demand help businesses?
It helps to calculate how competing firms’ prices will affect demand for their products
Give the formula for XED
% change in Qd of A / % change in price of B
What’s the term for a negative XED?
A complementary goods (since an increase in price for one good will decrease the demand for the other complement)
What’s the term for a positive XED?
Substitute goods (since a decrease in price of one good will decrease demand for a substitute)
What if 2 goods have an XED = 0?
This means they are unrelated goods
What do all supply curves have one thing in common?
That they slope upwards
What does supply mean?
When producers are willing and able to supply goods/services
Draw a supply curve
Give the formula for PES
% change in quantity supplied / % change in price
What is PES?
Measures how much quantity supplied changes in response to a change in price
What do all of PES have in common?
The value is always positive
Draw an elastic supply curve
Draw an inelastic supply curve?
What are the 5 factors which influence PES?
1) spare capacity
2) Availability of factors of production
3) State of economy
4) stockpiles and Perishability
5) Time period
What does spare capacity mean?
The space/capacity that’s not used
How does spare capacity affect PES?
Little spare capacity = inelastic PES
More spare capacity = elastic PES
How does availability of factors of production effect PES?
More availability of factors of production = elastic PES
Less availability of factors of production = Inelastic PES
How does the state of the economy affect PES
Bad state of economy = elastic
Good state of economy = inelastic
How does stockpiles & perishability affect PES
Easily stockpiled/not perishable = elastic
Hard to stockpile/perishable = inelastic
How does time affect PES?
Short run (when at least one factor of production is fixed) = inelastic PES
Long run (all factors of production can be changed) = elastic PES
What are the 5 main factors of the shift in supply? (Conditions of supply)
1) Technology
2) Weather
3) Costs
4) Number of Suppliers
5) Productivity
How does technology affect supply?
Advanced technology = shifts right
Terrible technology = shifts left
How does weather affect supply?
Good weather = rightward shift
Hurricane/tropical storm = leftward shift
How does costs affect supply?
Higher costs = leftward shift
Lower costs = rightward shift
How does number of suppliers affect supply?
Higher number = rightward shift
Lower number = leftward shift
How does productivity affect supply?
High productivity = rightward shift
Low productivity = leftward shift
What is the Price Mechanism?
Describes the interaction of supply and demand to determine prices
What are the 3 functions of the price mechanism?
1) signalling
2) incentivising
3) rationing
How does signalling help producers? (Give 3 chains)
- higher prices signal to producers that consumers want more goods
- lower prices signal to producers that consumers want fewer goods
How does incentivising help producers? (Give 2 ways)
- higher prices means more profit, increasing incentive to sell more
- lower prices reduce profits, reducing incentive to sell
How does rationing help producers?
Higher prices limit or ration the quantity demanded by consumers
What is equilibrium?
When supply = demand in a market
What does excess supply (surplus) mean?
When the price is above the equilibrium price, the quantity supplied will exceed the quantity demanded leading to excess supply (or a surplus).
What does excess demand (shortage) mean?
When the price is below the equilibrium price, the quantity demanded will exceed the quantity supplied, leading to excess demand (or a shortage).
Draw a diagram to show how the functions of the price mechanism eliminate excess supply in a market.
Draw a diagram to show how the functions of the price mechanism eliminate excess demand in a market.
