Topic 2 - Market and Demand Flashcards
Market
Buyers and sellers voluntarily meet to exchange goods and services
Effective demand
When a want or need is met by an ability and willingness to pay.
Latent demand
A desire to purchase is not matched by the ability to do so.
Individual demand
Relationship between quantity demanded and price by a single individual.
Market demand
Total demand for a good or service.
Law of Demand
Inverse relationship between price and quantity demanded.
Consumer surplus
The difference between the consumers willingness to pay for a commodity and the actual price paid by the,
Conditions of demand ( non-price )
Population size Income Complementary goods Taste Substitute goods
Substitute goods
A good in competing demand can be used in place of the other good
Normal good
A good of which demand increases as income rises, demand decreases as income falls
Inferior good
A good of which demand decreases as income rises and demand increases as income falls
Giffen goods
Low income, non-luxury product that defies standard economic law of demand.
Speculative demand
If the price of a good is predicted to increase in the future, this may increase the current demand of the good.
Veblen goods
These are goods of exclusive or ostentatious consumption
Price elasticity of demand
Measures the extent to which the demand for a good changes in response to a change in the price of that good.
Income elasticity of demand
Measures the extent to which the demand for a good changes in response to a change in income.
Cross-elasticity of demand
Measures the extent to which the demand for a good changes in the price of another good.
Formula for PED
% change in QD / % change in Price
Formula for YED
% change in QD / % change in income
Formula for XED
% change in QD of Good A / % change in price of Good B
Complementary good
This is a good whose demand increases with the popularity of its complements.
Income effect
Effect of a change in price on a quantity demanded from a consumer, becoming better or worse off as a result of the price change.
Substitute effect
Effect of a change in price on quantity demanded, arising from consumer switching to or from alternative (substitute) products.
Value if Price Elastic
less than -1
Value if Price Inelastic
between 0 and -1
Value if Unitary Elastic
-1
Value if Perfectly Inelastic
0
Value if Perfectly Elastic
Infinity
Determinants of PED
Amount of Competition Definition of the market Addictive products Luxuries & necessities Time taken
Total Consumer Expenditure
Price x Quantity
YED is income elastic when…
value is greater than 1
YED is income inelastic when…
value is between 0 and 1
Normal good =
Negative PED
Positive YED
Inferior good =
Negative PED
Negative YED
Giffen good =
Positive PED
Negative YED
Veblen good =
Positive PED and YED
XED Value for close complements =
High negative
XED Value for remote complements =
Low negative
XED Value for unrelated products =
Zero
XED Value for remote substitutes =
Low positive
XED Value for close substitutes =
High positive
Determinants of supply =
Productivity Indirect taxes Number of firms Technology Subsidy
Weather
Cost of production
