Topics of concern Flashcards
price elasticity of demand definition
The extent to which demand for a product changes when it’s price is changed
income elasticity of demand definition
The extent to which demand for a product changes when there is change in consumers real income
price inelastic
changes in price have little effect on demand
price elastic
changes in price have a big effect on demand
what determines price elasticity?
- degree of differentiation
- availability of substitutes
- branding and brand loyalty
what is a normal good?
positive income elasticity of demand
YED between 0.5 and 1.5
what is a luxury good?
very positive income elasticity of demand
YED of more than 1.5
what is an inferior good?
negative income elasticity of demand
what factors influence income elasticity of demand?
- whether the product is necessary or an indulgence
- who buys the product
what is the significance to businesses of YED?
helps to show why a balanced product portfolio is important (inferior good so well during a recession where is luxury goods can be a pain and vice versa)
if consumer income is increased how would a supply and demand diagram shift?
the demand line would shift up to indicate more people want to buy the product as they have more disposable income. this would also cause the point of equilibrium to be higher.
if consumer income is increased how would a supply and demand diagram shift?
the demand line would shift up to indicate more people want to buy the product as they have more disposable income. this would also cause the point of equilibrium to be higher.
if the price of a substitute product was too fall, how would this be reflected on a supply and demand diagram?
the demand line would be lower indicating less people want to buy this product as there is a cheaper alternative, the equilibrium would also fall
if production costs were to rise how would this be reflected on a supply and demand diagram?
the supply line would shift to the left indicating production would fall (don’t be fooled because the line ends up higher) because it would become more expensive and therefore producers would not be as inclined to do it. Equilibrium would also move to the left.
what is equilibrium price?
The price that is set in the market determined by where the supply or willingness to supply intersects with the willingness to purchase at a particular price.
what indicates a supply or a demand line has shifted?
the equilibrium point will be redrawn to show the change and the Price and Quantity letter indicators will also be rewritten with a number to show the original vs old line.
