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Economics > Topic 3: Demand and Supply > Flashcards

Topic 3: Demand and Supply Flashcards

1
Q

define demand

A

the Q of a G or S that consumers are will and able to buy at various price levels at a given point in time (demand of all consumers = market demand)

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2
Q

what are the factors that affect demand?

A
  • The price of the G or S itself
  • The price of other G&S
  • Expected future prices
  • Changes in consumer taste and preferences
  • The level of income
  • The size of the population and age distribution
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3
Q

how does the price of the G or S affect D?

A

Consumers must consider whether or not a product is worth buying at the price it is selling for. However, if a product is a necessity than consumers will buy it, even if it is considered expensive, since they need it.

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4
Q

how does the price of other G&S affect D?

A

There are substitute items and complementary items
If the P of a substitute G increases then the D for the original G will increase (assuming that its P stays the same)
If the P of a complementary G increases then the D for the original G with decrease (assuming that that its P stays the same)

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5
Q

how does expected future prices affect D?

A

If consumers expect that the prices of smth will increase in the future, then they will increase their current demand

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6
Q

how does changes in consumer taste affect D?

A

As consumer tastes change over time, so will the D of certain G&S

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7
Q

how does the level of income affect consumer taste?

A

As people earn higher incomes, they will increase their D since they can afford more/more expensive things (luxury G)

income distribution impacts D aswell

consumer expectations of their future income will also impact D because if they think that their income will decrease then they may be hesitant to buy and instead, save their money for the future

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8
Q

define income distribution

A

the way in which an economy’s income is spread among members of different social and socioeconomic groups

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9
Q

how does the size and age of the population affect D?

A

population affects the amount of G demanded
age affects the type of G demanded

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10
Q

define ceteris paribus

A

an assumption used in economics to isolate the relationship between two economic variables. “other things being equal”, “nothing else changes”

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11
Q

what is the demand schedule?

A

shows the Q of G that will be demanded over a range of prices - demonstrates the relationship between P and Q demanded.

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12
Q

state the law of demand

A

The D of consumers fall as prices rise.

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13
Q

what are the movements along the demand curve?

A

EXPANSION AND CONTRACTION
expansion of D: when a decrease in P of a G or S increases D (moves down the D curve)
contraction of D: when an increase in P of a G or S decreases D (moves up the D curve)

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14
Q

what does does it mean when the D curve moves to the right?

A

This means that D has increased
Furthermore, consumers are willing and able to buy more of the product at each possible price than before and willing to buy the same Q at a more expensive price

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15
Q

what does it mean when the D curve moves to the left?

A

This means that D has decreased
Furthermore, consumers are willing and able to buy less of the product at each possible price than before and willing to buy the same Q at a lower price

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16
Q

define price elasticity of demand

A

the responsiveness or sensitivity of the Q demanded of a product, given that its price has changed

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17
Q

difference between elastic, inelastic, and unit elastic demand

A

Elastic: a strong response to a change in price
unit: a proportionate response to a change in price (total amount spent by consumers hasnt changed)
inelastic: a weak response to a change in price

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18
Q

What is the importance of P elasticity?

A

being aware of the price elasticity of D helps determine the best pricing strategy for firms and gov (whether or not they should change prices)

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19
Q

what is the ‘total outlay method’?

A

it is a way to calculate the price elasticity of D by looking at the effect of changes in price has on revenue earned by the producer.
If P and R move in the same direction than D is inelastic
If P and R move in opposite directions than D is elastic
If R remains unchanged in response to a P change, than D is unit elastic

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20
Q

how do you calculate the total outlay?

A

multiply the P by the Q demanded at said P

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21
Q

define perfectly elastic and inelastic demand

A

perfectly elastic D: (horizontal line) consumers are only willing to pay one price and any given quantity

perfectly elastic D: (vertical line) consumers are willing to pay any price for a single given quantity

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22
Q

What are the factors that affect the elasticity of demand?

A
  • whether the G is a luxury or a necessity
  • whether the G has any close substitutes
  • the expenditure on the product as a proportion of income
  • the length of time subsequent to a P change
  • whether a G is addictive or not
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22
Q

impact of ‘whether the G is a luxury or necessity’

A

necessities have relatively inelastic D because people are willing to buy it even if the P increases since they NEED it

luxuries have higher elastic D because consumer are willing not to buy it even if P increases because they DONT NEED it

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23
Q

impact of ‘close substitutes’

A

G WITH CLOSE SUBS will have elastic D because consumers arent committed to a particular product. This means that if the P for a G increases, consumers will demand less of that product and instead, purchase the sub (assuming that its P stayed the same)

G WITHOUT CLOSE SUBS will have inelastic D because consumers are very committed to that particular product. This means that even if the P changes, consumers will still buy it since there are not other subs for them to buy instead.

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24
Q

impact of ‘expenditure on the product as a proportion of income’

A

the bigger the proportion of income G&S takes up, the more elastic its D will be.

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25
Q

impact of ‘length of time subsequent to price change’

A

What the P of a certain product changes, there may not be immediate changes in D as consumers still need to become aware of and adjust to the change.im

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26
Q

impact of ‘whether a G is addicting or not’

A

G that are addictive have relatively inelastic D since consumer would still buy it even if it became more expensive due to their addiction

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27
Q

define supply

A

the Q of a G or S that all firms in a particular industry are willing and able to offer for sale at different P levels, at any given point in time.

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28
Q

What are the factors affecting mkt Supply?

A
  • The P of the G or S itself
  • The P of other G or S
  • The state of technology
  • Changes in the cost of factors of prod’n
  • The Q of the G available
  • Climatic and Seasonal changes
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29
Q

How does the P of the G or S itself impact mkt S?

A

it will influence the producers ability and willingness to supply it

eg. if the P was too low, producers would not supply it since the P would be too low to cover their costs of prod’n

30
Q

How does the P of other G&S impact mkt S?

A

firms will be more willing to supply G that sell products that are more profitable

31
Q

How does the state of technology impact mkt S?

A

improvements in tech lower prod’n cost and allow firms to supply more G

32
Q

How does changes in the cost of factors of prod’n impact mkt S?

A

any fall in the cost of factors of prod’n will allow firms to increase their S of a particular G whereas any rise would make it more difficult for firms to maintain their current supply.

33
Q

How does the Q of the G available impact mkt S?

A

it is a limiting factor that affects supply

34
Q

How does climatic and seasonal influences impact mkt S?

A

it impacts agricultural prod’n (which is part of Land - natural resources - a factor of prod’n)

35
Q

What is a supply schedule?

A

a visual representation of the Q of a G that will be supplied over a range of P, at any given point in time

36
Q

what is the law of supply?

A

As prices increases, supply increases

37
Q

What are the two movements ALONG the supply curve?

A

expansion of S: an increase in the P of G&S causes an increase in Q supplied (upward movement along S curve)

contraction of S: a decrease in P of G&S causes a decrease in Q supplied (downward movement along S curve)

38
Q

an increase in S moves the S curve in what way?

A

to the right

39
Q

a decrease in S moves the S curve in what way?

A

to the left

40
Q

What does it mean when there is an increase in S?

A

firms are willing to supply MORE at each P level than before.
firms are willing to supply a given Q at a LOWER P than before.

41
Q

What does it mean when there is a decrease in S?

A

firms are willing to supply LESS at each P level than before.
firms are willing to supply a given Q at a HIGHER P than before.

42
Q

define price elasticity of S

A

the RESPONSIVENESS of Q supplied to a change in P.

43
Q

How is the price elasticity of S calculated?

A

% change in Q supplied divided by the % change in P

44
Q

define perfectly elastic S

A

producers are willing to produce any Q of a G or S for a single given P

represented as a horizontal line

45
Q

define perfectly inelastic S

A

producers are willing to supply a given Q for any Price

represented as a vertical line

46
Q

what are the factors that affect the P elasticity of S?

A
  • time lags after a P change
  • the ability to hold and store stock
  • excess capacity
47
Q

how does time lags after a P change impact the P elasticity of S?

A

the amount of time producers have to respond to a P change, the more elastic the S for the product in question.

in the short run, P elasticity of S increases (likely to be still relatively inelastic)

in the long run, it will be easier for producers to increase any of the inputs and facilitate a greater increase in prod’n in response to a P change - making supply relatively elastic.

48
Q

how does the ability to hold and store stock impact the P elasticity of S?

A

The easier it is to hold stock, the more elastic the S.
the more inventory, the more elastic the S

49
Q

define inventory

A

the total stock of G and S held by a firm at a particular point in time, which is intended for sale to costumers

50
Q

how does excess capacity impact the P elasticity of S?

A

S will be elastic when firms have excess capacity since they can respond quickly to P changes by using their existing resources more intensively

S will be inelastic when firms are already using their resources at full capacity

51
Q

What is the price mechanism?

A

the process by which the forces of D and S interact to determine the mkt P at which G&S are sold and the Q produced

52
Q

What is Market equilibrium?

A

The situation where the Q supplied and the Q demanded are equal at a certain P level (meaning that the mkt clears)

53
Q

Where is equilibrium on a graph?

A

where the D and S curve intersect

54
Q

What happens when there is too much D and not enough S?

A

There will be competition among buyers for the limited amount of G, causing the P to increase. An increase in P causes an expansion in S and a contraction. This will continue until we eventually reach the intersection of the S and D curves (equilibrium or mkt-clearing P)

55
Q

What happens then there is too much S and not enough D?

A

In order to remove excess S, sellers will offer the G&S at a lower P. The fall in P will decrease S and increase D. This causes a contraction in S and an expansion in D. This will continue until we eventually reach the intersection of the S and D curves (equilibrium or mkt-clearing P)

56
Q

How does an increase D change equilibrium?

A

An increase in D raises both EP and EQ

57
Q

How does a decrease in D change equilibrium?

A

A decrease in D decreases both EP and EQ

58
Q

How does an increase in S change equilibrium?

A

An increase in S lowers EP and raises EQ

59
Q

How does a decrease in S change equilibrium?

A

A decrease in S raises EP and lowers EQ

60
Q

define product market

A

is the interaction of D for and S of the outputs of prod’n

61
Q

define factor market

A

a mkt for any input into the prod’n process, including land, labour, capital, and enterprise

62
Q

define allocative efficiency

A

allocative efficiency refers to the economy’s ability to allocate resources to satisfy consumers want

63
Q

What is mkt failure?

A

occurs when the P mechanism takes into account private benefits and costs of prod’n to consumers and producers, but it fails to take into account indirect costs such as damage to the environment

64
Q

What is the purpose of a price ceiling?

A

The gov imposes the maximum price that can be charged for a particular commodity so that there is disequilibrium, with excess demand

65
Q

What is the purpose of a price floor?

A

The gov imposes the minimum price that can be charged for a particular commodity so that there is disequilibrium, with excess supply

66
Q

What does ‘internalising the externality’ mean?

A

When the government makes individual businesses pay for their social costs created by prod’n

67
Q

define merit goods

A

goods that are not produced in sufficient Q by the private sector because private individuals do not place enough value on those G
(they involve positive externalities that are not fully enjoyed by the individual consumer, eg. education and healthcare)

68
Q

define public goods

A

G that private firms are unwilling to supply since they are unable to determine who gets to benefit from those goods even if individuals didn’t pay for them

69
Q

What does the gov do when the mkt P is too high and how does it help?

A

price ceiling - reduces price and creates a shortage in Q [disequilibrium]

70
Q

What does the gov do when the mkt P is too low and how does it help?

A

price floor - increases price and created an excess in Q [disequilibrium]

71
Q

What does the gov do when mkt Q is too high and how does it help? [negative externalities]

A

taxes - increases EQ P and reduces EQ Q

72
Q

What does the gov do when mkt Q is too low and how does it help?
[positive externalities]

A

subsidies - reduces EQ P and increases EQ Q

73
Q

What does the gov do when the mkt does not provide G or S?

A

The gov provides the G or S by collecting taxation revenue to finance its supply of public G

Economics (12 decks)

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