THEME 1.2 : THE MARKET- DEMAND, SUPPLY & ELASTICITY Flashcards
What is the relationship between price and the quantity demanded?
-when the quantity demanded decreases the price will increase. As customers are willing and able to buy less as the prices rise. When quantity demanded increases the price will lower.
What is meant by demand?
-the amount of product that consumers are willing and able to purchase at any given price.
What is meant by supply?
-the amount of a product which suppliers will offer to the market at a given price.
What is the relationship between the quantity supplied and the price of a product?
-as the quantity supplied increases so does the price of the product. If prices increase the supplier will attempt to maximize their profits by increasing quantity offered for sale.
What is meant by market equilibrium?
-it’s where the supply and demand curve intersect. It is the point where the quantity that customers are willing to purchase matches the quantity that the suppliers are willing to sell at a given price.
What does it mean if a demand curve shifts to the right?
-this means that the demand has increased for each price level.
What does it mean if a demand curve shifts to the left?
-this means that the demand has decreased for each price level.
What factors affect the demand of a product?
-Population change
- Advertising can cause the demand curve to shift to the right
- Seasonality
- Income (consumers disposable)
- Fashion changes in taste
- Income tax (external shocks)
- Complementary (change in prices of other goods, customers may buy these instead.)
What happens to the equilibrium price of a product if the demand changes?
-assuming the supply curve remains the same:
- when the quantity demanded increases the equilibrium price will also increase.
- when the quantity demanded decreases the equilibrium price will also decrease.
What does it mean if a supply curve shifts to the right?
-the quantity supplied for a given price will increase.
What factors affect supply?
-Productivity
-Indirect taxes
-No. of firms in the market
-Technology/production techniques, may increase productivity increasing supply (lowers production costs)
-Subsides( ‘free loans’ from gov. to businesses to produce a particular product in the form of a grant)
-Weather, bad weather may mean less crops and plants are supplied.
-Costs of production! : inc. in due to energy prices, in raw materials, in rent/mortgage rate and living wages
Effect on the equilibrium price of a change in supply?
assuming the demand curve stays the same:
- as the quantity supplied increases the equilibrium price decreases.
- as the quantity supplied decreases the equilibrium price increases.
What is meant by the price elasticity of demand (PED)?
-a measure of the responsiveness of demand to a change in price
What does it mean if (PED) is between 0 and -1?
-(INELASTIC) this means that price elasticity is low, most likely because of well-differentiated, well branded products.
What does it mean if (PED) is -1?
-this means that the percentage change in demand is the same as the percentage change in price.
