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ECON102 > Week 2 - Demand and Supply, Elasticity > Flashcards

Week 2 - Demand and Supply, Elasticity Flashcards

1
Q

What does the market consist of?

A

the market for any good or service consists of all buyers and sellers of that good or service

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2
Q

What are all the buyers in the market?

A

consumers

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3
Q

What do consumers prioritise

A

utility maximisation within budget constraints

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4
Q

What do producers prioritise

A

Profit maximisation, given the consumers demand and also input costs

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5
Q

What does the demand curve look like

A

Downward sloping

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6
Q

What is the buyers reservation price?

A

the reservation price is the largest amount that a consumer is willing to pay for a good

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7
Q

What is the buyers reservation price equal to

A

equal to the benefit they receive from the good
(when the price of a good is higher, there will be fewer buyers who value the good more than the price)

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8
Q

What does the downward sloping demand curve represent?

A

as the price of a good/ service decreases, buyers wish to buy more (ceteris paribus, all else equal)

as the price of a good/ service increases, buyers wish to buy less (ceteris paribus)

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9
Q

What are the reasons for a downward sloping demand curve?

A
  1. Buyers reservation price
  2. Substitution effect
  3. Income effect
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10
Q

What is the substitution effect?

A

When the price of a good (pizza) rises, consumers will switch to other substitute goods (pasta, chicken etc), so the demand of the current good will be lower

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11
Q

What is the income effect?

A

When the price of a good rises, consumers become effectively poorer. As a result, they may purchase less of the good.

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12
Q

What is an exception of an upward sloping demand curve?

A

a Giffen good (extremely rare), as this good becomes more expensive consumers want to buy more of it

eg during the Irish Fathom, potatoes main consumption, even when price increases, only way to survive is to buy more of it

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13
Q

What is the Water-Diamond Paradox?

A

Water is essential to life, and a diamond is not so important to life. Yet water is so much cheaper than a diamond

An apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market

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14
Q

What does the supply curve show the relationship between

A

how much of a good/ service sellers wish to sell, and the price

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15
Q

How is the supply curve upward sloping

A

As the price of a good/ service increases, sellers wish to sell more (ceteris paribus)

As the price of a good/ service decreases, sellers wish to sell less (ceteris paribus)

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16
Q

Why do supply curves slope upwards?

A

Sellers reservation prices

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17
Q

What is the sellers reservation price?

A

The minimum price required by a seller to sell a unit of a good

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18
Q

Why may the reservation price differ across sellers?

A

as the sellers differ with respect to their opportunity cost of supplying pizza
As the market price decreases, sellers with high reservation prices drop out of the market

19
Q

What is market equilibrium

A

when there is no pressure on prices/ quatities to change from its current state

20
Q

When is there excess demand?

A

Some buyers want to buy but cannot, buyers are frustrated, frustrated buyers offer a higher price

upward pressure on prices. market is out of equilibrium

(below equilibrium price)

21
Q

What do price ceilings cause below equilibrium price

A

Excess demand

21
Q

When is there excess supply?

A

Some sellers want to sell but cannot. Sellers are frustrated, frustrated sellers offer a lower price.

Downward pressure on prices. Market is out of equilibrium

(above equilibrium price)

22
Q

What do price ceilings cause above equilibrium price

A

not affective, no excess supply since market still at equilibrium

23
Q

What are price ceilings

A

the price cannot be higher than a certain amount

24
Q

What are price floors

A

the price cannot be lower than a certain amount

25
Q

What do price floors cause above equilibrium price

A

Excess supply

26
Q

How does a change in quantity demanded represented on the graph

A

movement along a demand curve

27
Q

How does a change in demand represented on the graph

A

entirely new demand curve (shift)

28
Q

What are the 5 factors that shift demand

A
  1. Change in prices of related good (substitute goods, complementary goods)
  2. Change in income
  3. Change in preferences
  4. Change in population
  5. Change in expectation of future prices
29
Q

What is a substitute good?

A

goods consumed in place of another
eg pepsi and coke, chicken and fish

if the price of a substitute good increases, then demand increases, shift right

30
Q

What is a complementary good?

A

goods that are consumed together
eg bread and butter, golf balls and golf clubs

if the price of a complementary good decreases, then demand increases (shift right)

31
Q

What does an increase in income lead to?

A

an increase in demand for a normal good
a decrease in demand for an inferior good

32
Q

What does a change in preferences lead to?

A

Eg smoking having severe negative health consequences, leading to a decrease in demand for tobacco

33
Q

What does a change in population lead to?

A

more buyers leads to an increase in demand

34
Q

What does a change in the expectation of future prices lead to?

A

Eg if i believe the price of iPads will increase dramatically next year, may rush out and buy one now

35
Q

What are the 4 factors that shift supply?

A
  1. Weather
  2. Change in expectations
  3. Change in the number of sellers
  4. Change in productions costs
36
Q

What is price elasticity of demand?

A

measure of the responsiveness of the quantity demanded to changes in the price (sensitivity)

37
Q

What is the price elasticity of demand equation?

A

percentage change in Qd/ percentage change in Price

38
Q

What values when demand is elastic

A

Elasticity > 1

39
Q

What values when demand is inelastic

A

Elasticity < 1

40
Q

What values when demand is unit elastic

A

Elasticity = 1

41
Q

What does it mean when price is elastic

A

consumers fairly responsive to a price change

42
Q

What does it mean when price is inelastic

A

when consumers are fairly unresponsive to a price change

ECON102 (8 decks)

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