Theory of demand and supply Flashcards
What is the definition of demand?
It is the amount of goods and services that consumers are able and willing to buy at each possible price in a given period of time, ceteris paribus
What is the definition of law of demand?
It states that in a given time period, quantity demand is inversely related to its price, ceteris paribus
What are the non-price determinants of demand?
E: Ease of borrowing + Expectation of future prices (change current demand)
G: Government polices (direct taxes;income taxes , campaigns)
Y: Income (assume inferior or normal goods)
P: Population size + Price of related goods (assume complements or substitutes in consumption)
T: Taste and preferences
S: Seasonal factors
What is the definition of supply?
It refers to the amount of goods and services that producers are willing and able to sell at each possible price in a given period of time, ceteris paribus
What is the definition of law of supply?
In a given period of time, quantity of supply is directly related to its price, ceteris paribus
What are the non-price determinants of supply?
W: Weather
E: Expectation of future prices (change current supply)
T: Technology (affects efficiency, COP, profit, productivity)
P: Price of related goods(Assume competitive or joint supply)
I: Input prices (Affects cost of production, profits)
G: Government polices (indirect taxes; corporate tax, goods and services tax + subsidies)
How to describe the price adjustment process when demand and/or supply changes?
1) SS and DD shifts from _to _ etc.
2) A surplus/shortage arises which puts downward/upward pressure on price
3) As price changes, Qs and Qd increases/decreases according to law of supply and demand respectively
4) The market reaches a new equilibrium price at Pe and equilibrium quantity at Qe, ceteris paribus
What is the definition of price elasticity of demand (PED)?
It measures the degree of responsiveness of quantity demanded of a good to a change in its price, ceteris paribus
What does it mean when demand/supply is price elastic (PED>1)?
When price changes, quantity demand changes more than proportionally, ceteris paribus (vice versa)
What does it mean demand/supply is price inelastic (PED<1)?
When price changes, quantity demand changes less than proportionately, ceteris paribus (vice versa)
What are the determinants of PED?
S: Degree of availability of substitutes (number and closeness of goods, definition of good)
H: Habit
I: Proportion of income
T: Time period
what is the definition of price elasticity of supply (PES)?
It measures the degree of responsiveness of quantity supply of a good to a change in its price, ceteris paribus
What are the determinants of PES?
C: Cost of production
P: time Period
F: Factor mobility
Why is PED for a good negative?
-state definition of PED
-it is based on law of demand, where quantity demanded is inversely related to its price
(formula is % change of Qd/ % change in price)
Why is PES for a good positive?
-State definition of PES
-it is based on law of supply, where quantity supplied is directly related to its price
(formula is % change of Qs/ % change in price)
What are the types of governmental intervention with respect to SS and DD?
- Price controls (Price floor & ceiling)
- Quantity controls (Quota)
- Tax & Subsidies (on producers)
What is the definition of a price floor?
It is a legally establish minimum price above market equilibrium price
What are the effects of a price floor (on producers)?
-Price floor leads to increase in Qs and decrease in Qd
-surplus arises and cannot be eliminated as producers cannot sell below Pf
-Hence only Qd is traded in the market and welfare loss ABC arises
(Gov may step in to buy up surplus QdQs)
What is the definition of a price ceiling?
It is a legally established maximum price below market equilibrium price
What are the effects of a price ceiling (mainly on consumers)?
-Price ceiling leads to decrease in Qs and increase in Qd
-Shortage arises but cannot be eliminated as producers cannot sell above Pc
-Hence only Qs is traded in the market and welfare loss ABC arises
(Black market may arise)
Wage dd ss?
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