Topic 2 - Demand and Supply Flashcards
What is demand?
The different quantities that consumers are willing and able to buy at different prices.
What is the Law of Demand?
Negative relationship between price and quantity demanded.
What are the non-price determinants of demand?
Income, tastes and preferences, future price expectations, price of related goods, number of consumers.
What is a normal good?
A good for which demand increases as income increases.
What is an inferior good?
A good for which demand decreases as income increases.
What is supply?
The different quantities that producers are willing and able to sell at different prices.
What are the non-price determinants of supply?
Costs of factors of production, technology, prices, producer price expectation, government intervention, number of firms, shocks.
What is the Law of Supply?
Positive relationship between price and quantity supplied.
What is elasticity?
Measures the responsiveness of a variable as a result of a change in another variable.
What is Price Elasticity of Demand (PED)?
Measures the responsiveness of the quantity demanded of a good as a result of a change in price.
What does PED > 1 indicate?
Demand is elastic.
What does PED < 1 indicate?
Demand is inelastic.
What does PED = 1 indicate?
Demand is unit elastic.
What does PED = 0 indicate?
Demand is perfectly inelastic.
How is Price Elasticity of Demand calculated?
% change in Qd / % change in P.
What are the determinants of PED?
SPLAT: Substitute goods, proportion of income spent, luxury vs. necessity, addiction, time to respond.
What is the Total Revenue Test for PED?
PED > 1: Price falls, total revenue increases; Price increases, total revenue decreases. PED < 1: Price falls, total revenue falls; Price increases, total revenue increases.
What is Price Elasticity of Supply (PES)?
Measures the responsiveness of the quantity supplied of a good as a result of its change in price.
What does PES > 1 indicate?
Supply is elastic.
What does PES < 1 indicate?
Supply is inelastic.
What does PES = 1 indicate?
Supply is unit elastic.
What does PES = 0 indicate?
Supply is perfectly inelastic.
What are the determinants of PES?
FASTR: Factors of production mobility, ability to store stocks, spare capacity of firms, time to adjust, rate at which costs increase.
What is Income Elasticity (YED)?
Measures the responsiveness of the quantity demanded of a good to a change in income.
How is YED calculated?
YED = % change of Qd / % change in Income.
What does YED > 0 indicate?
Normal good.
What does YED < 0 indicate?
Inferior good.
What is Cross Price Elasticity (XED)?
Measures the responsiveness of the quantity demanded of a good to a change in the price of different goods.
How is XED calculated?
XED = % Change in Qd of Good A / % change in price of Good B.
What does XED > 0 indicate?
Substitutes.
What does XED < 0 indicate?
Complements.
What is consumer surplus?
Difference between what a consumer is willing to pay and what they actually paid for a product.
What is producer surplus?
Difference between the market price and the lowest price a producer is willing to accept to produce a good.
What is deadweight loss?
Lost efficiency when the socially optimal quantity is not being produced.
What is the Double Shift Rule?
When two curves shift at the same time, either price or quantity will be indetermined.
What are price controls?
Form of government intervention that sets a maximum or minimum price that producers can charge for certain goods or services.
What is a price ceiling?
The legal maximum price set below the market equilibrium by the government for a good or service.
What is a price floor?
The legal minimum price set above the market equilibrium by the government for a good or service.
What happens if the price ceiling is set above equilibrium?
Nothing.
What is an indirect tax?
Tax that is placed on the expenditure of a good or a service that is partially paid by the consumers but directly paid for by the producers to the government.
What does YED > 1 indicate?
normal good - luxury good
