Unit 2.2 How Markets Work Flashcards
1
Q
Demand
A
- The willingness and ability of consumers to purchase goods/services at different prices
2
Q
Law of Demand
A
- Ceterus Paribus, when the price of a product is increased, the quantity demanded will decrease, and vice-versa.
3
Q
Quantity Demanded
A
- The amount of a particular good or service that consumers are willing to buy at a given price.
4
Q
Demand Curve
A
- Plotting the (market) quantity demanded for a particular product at every given price.
- x axis = Quantity Demanded
- y axis = Price
- Downward sloping Curve
5
Q
Individual Demand/Supply
A
Demand/Supply trends of just one consumer/producer
6
Q
Market Demand/Supply
A
Total Demand/Supply of the product from all consumers/producers.
7
Q
Extension in demand
A
- Right+Downward Movement along the demand curve.
- Caused by a decrease in price of a product.
8
Q
Contraction in demand
A
- Left+upward Movement along the demand curve
- Caused by an increase in price of a product.
9
Q
Shift in Demand
A
- Movement of the demand itself (the entire curve shifts left or right)
- The quantity demanded changes at every given price
- Caused because of NON PRICE FACTORS CHANGING
- Leftward Shift = Decrease
- Rightward Shift = Increase
10
Q
Rightward Shift of Demand Curve
A
-
Increase in quantity demanded for every given price, because of a NON PRICE FACTOR
Causes: - An Increase in consumers’ incomes (like a rise in employment rates)
- A reduction of taxes on incomes
- A rise in the price of substitutes
- A fall in the price of complements
- Consumers’ tastes or fashions changing in favor of the product.
- Increased advertising of the product,
- A rise in the population
- External Factors (weather, nature, unpredictabilities)
11
Q
Leftward Shift of Demand Curve
A
-
Decrease in quantity demanded for every given price because of a NON PRICE FACTOR
Causes: - A decrease in consumers’ incomes
- An increase in taxes on incomes
- A fall in the price of substitutes
- A rise in the price of complements
- Consumers’ tastes and fashions changing in favor of other products
- Decreased advertising (being cut or banned)
- A fall in the population
- External Factors (weather, nature, unpredictabilities)
12
Q
Non Price Factors
A
External Factors affecting the general trends in demand and supply
13
Q
Inferior Good
A
- A good for which demand falls as incomes rise
- Considered cheap or frugal
14
Q
Disposable Income
A
- The amount of income people have left to spend after taxes on their incomes have been deducted.
15
Q
Supply
A
- The willingness and ability of producers to produce and sell goods/services at different prices.
16
Q
Law of Supply
A
- Ceterus Paribus, when the price of a product is increased, the quantity supplied will increase, and vice-versa.
17
Q
Quantity Supplied
A
- The amount of a particular good or service that producers are willing and able to produce and sell at a given price.
18
Q
Supply Curve
A
- Plotting the (market) quantity supplied for a particular product at every given price.
- x axis = Quantity Demanded
- y axis = Price
- Upward sloping Curve
19
Q
Extension in Supply
A
Right+Upward Movement along the supply curve.
- Caused by an increase in price of a product.
20
Q
Contraction in Supply
A
Left+Downward Movement along the supply curve.
- Caused by a decrease in price of a product.
21
Q
Shift in Supply
A
- Movement of the supply itself (the entire curve shifts left or right)
- The quantity supplied changes at every given price
- Caused because of NON PRICE FACTORS CHANGING
- Leftward Shift = Decrease
- Rightward Shift = Increase
22
Q
Rightward Shift in Supply Curve
A
-
Increase in quantity supplied for every given price, because of a NON PRICE FACTOR
Causes: - A decrease in the price and profitability of other products
- A decrease in the cost of the factors of production (raw materials)
- An increase in availability of resources
- Technical Progress and improvements in production processes
- An increase in business optimism and projections of profit
- The government paying subsidies
- The government cutting taxes on profits
- External Factors (weather, nature, unpredictabilities)
23
Q
Leftward Shift in Supply Curve
A
-
Decrease in quantity supplied for every given price, because of a NON PRICE FACTOR
Causes: - An increase in the price and profitability of other products
- An increase in the cost of the factors of production (raw materials)
- A decrease in availabilty of resources
- Technical failures
- A decrease in business optimism and projections of profit
- The government withdrawing subsidies
- The government increasing taxes on profits
- External Factors (weather, nature, unpredictabilities)
24
Q
Market Price
A
- The price for which the quantity demanded and quantity supplied are equal
- Point of intersection between the demand and supply curves
- The price at which the market remains at
25
Equilibrium
- A situation where the quantity demanded is equal to the quantity supplied
26
Disequilibrium
- A situation where the quantity supplied and quantity demanded are not equal.
27
Shortage
- Type of disequilibrium
- When the quantity demanded is greater than the quantity supplied
- Any price lower than the equilibrium price
- Any point below the intersection point.
- Price needs to increase to return to equilibrium
28
Surplus
- Type of disequilibrium
- When the quantity demanded is less than the quantity supplied
- Any price higher than the equilibrium price
- Any point above the intersection point.
- Price needs to decrease to return to equilibrium
29
Shift in Demand Curve
- Demand goes from D to D1
- Supply Stays at S
- Equilibrium Price moves from P1 to P2
- Final Quantity Demanded/Supplied moves from Q1 to Q2
- Leftward Shift -> Equilibrium Price Decreases
D1 Equilibrium Price Increases
D1>D; P1>P; Q1>Q
30
Shift in Supply Curve
- Supply goes from S to S1
- Demand Stays at D
- Equilibrium Price moves from P1 to P2
- Final Quantity Demanded/Supplied moves from Q1 to Q2
- Leftward Shift -> Equilibrium Price Decreases
S2P1; Q2 Equilibrium Price Increases
S2>S1; P2Q1
31
Price Elasticity of Demand
- The extent of the response of the quantity demanded to the change in price.
- How severely does QD increase of decrease with a change in price.
- Denoted by the inverse of the slope of the demand curve
- Sign is usually negative, but does not really matter
Formula:
% Change in Quantity Demanded
-------------------------------------------------
% Change in Price
32
Elastic Demand
- When a change in price leads to a greater change in quantity demanded.
- |PED| > 1
- Prices are usually decreased
33
Inelastic Demand
- When a change in price leads to a smaller change in quantity demanded
- |PED|<1
- Prices are usually increased
34
Unitary Elastic Demand
- When a change in price leads to an equal change in quantity demanded.
- |PED| = 1
35
Perfectly Inelastic Demand
- When a change in price leads to no change in quantity demanded.
- |PED| = 0
36
Factors Causing Elastic Demand
- It is a luxury good (wants)
- Substitutes exist and are easily available
- Consumption can be postponed
- Large part of total expenditure
- Low Income Level Consumers
- Significant (Relatively High) Prices
- Less or no brand loyalty
37
Factors causing Inelastic Demand
- It is a necessary good (needs)
- Substitutes do not exist or are not easily available
- Consumption is immediate
- Small part of total expenditure
- High Income Level Consumers
- Insignificant (Relatively Low) Prices
- High Brand Loyalty
38
Price Elasticity of Supply
- The extent of the response of the quantity supplied to the change in price.
- How severely does QS increase or decrease with a change in price.
- Denoted by the inverse of the slope of the supply curve
- Sign is usually positive, but does not really matter
Formula:
% Change in Quantity Supplied
-------------------------------------------------
% Change in Price
39
Elastic Supply
- When a change in price leads to a greater change in quantity supplied.
- |PES| > 1
40
Inelastic Supply
- When a change in price leads to a smaller change in quantity supplied.
- |PES| < 1
41
Perfectly Elastic Demand
- When a change in price leads to an infinite change in quantity demanded
- |PES| = infinity
42
Unitary Elastic Supply
- When a change in price leads to an equal change in quantity supplied
- |PES| = 1
43
Perfectly Elastic Supply
- When a change in price leads to an infinite change in quantity supplied
- |PES| = infinity
44
Perfectly Inelastic Supply
- When a change in price leads to no change in quantity supplied
- |PES| = 0
45
Factors Causing Elastic Supply
- It takes a short time to produce the goods
- Resources are easily available
- Products can be stored for a long time
46
Factors Causing Inelastic Supply
- It takes a long time to produce the goods
- Resources are unavailable (very scarce)
- Products are perishable and cannot be stored for long times
47
Taxes
- A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to fund government spending and various public expenditures.
48
Direct Taxes
- Taxes levied directly to consumers (income tax)
49
Indirect Taxes
- Taxes levied indirectly to producers and consumers through goods and services
- Can be regarded as an additional cost of production
- Two types: Specific Tax and Percentage Tax
50
Specific Taxes
- Type of indirect tax
- Does not vary with quantity or price
- One specific amount added to price of one unit.
- S1 + tax is parallel to S (upward)
51
Splitting the Burden of Specific Taxes
- Burden of the tax is split between the consumers and producers.
- Consumers end up paying higher prices foe the product
- Producers face an increased cost of production.
- Elastic Demand -> Producers bear more burden
- Inelastic Demand -> Consumers bear more burden.
- Supply curve shifts leftward (appear upward)
- Equilibrium Price is Higher
52
Percentage Taxes
- Type of indirect tax
- Varies with the price (percentage of price of one unit)
- S1+tax is not parallel to S. (upward)
53
Impact
- On whom the taxes are originally levied
54
Incidence
- Who ends up paying the burden (majority of it)
55
Subsidies
- Direct or indirect payment to individuals or firms usually in thr form of cash payments by the government.
- Money + Resources provided by gov to encourage production and development of a product. (May or may not be taken back)
- Reduces cost of production
- Rightward (appear downward) move of the Supply Curve
56
Stakeholders
Anyone who is impacted positively or negatively by the imposing of something
57
Stakeholders of Tax
- Consumers (They pay higher prices)
- Government (They gain more money)
- Producers (They lose or gain money - based on how the burden is split)
