Week 2 - the microeconomic environment Flashcards
What are 3 factors of the internal environment
- suppliers
- customers
- competitors
What is demand
The ability and willingness to buy a specific quantity of goods in a given time period
What does effective demand represent
1 desire to purchase
2 ability to pay
3 willingness to pay
What is the law of demand
When the price of a product goes up = demand will decrease
When the price of a product goes down = the quantity demanded will go up
What does the demand curve relate to
the relationship between price and demand
What will external, non- profit factors do to the demand curve
Shift the curve
External factors shifting the demand curve
- consumer income
- tastes and preferences
- number of buyers
- price of alternatives
- expectations of future prices
What is consumer surplus
The value consumers get from a good but do not have to pay for
How to calculate consumer surplus
reservation price - real price
What is supply
The ability and willingness to sell or produce in a given period of time
What is the law of supply
the ability and willingness to sell or produce in a given period of time
The law of supply
When the price of a product goes up = quantity supplied will go up
When the price of a product goes down = quantity supplied will decrease
Factors impacting supply
- cost of production
- profitability of substitutes
- nature of product
- aims and expectations of producers
Why businesses expand supply when market prices go up
1 profit - higher profit
2 new entrants
3 economies of scale
What is equilibrium price
The price at which the quantity of a good or service is equal to the quantity supplied by producers. There is no excess demand or excess supply
What is equilibrium quantity
The amount of goods and services that are bought and sold at the equilibrium price. Represents the quantity where the intentions of buyers and sellers match
When does excess supply happen
Occurs when the quantity of goods or services supplied exceeds the quantity demanded at a given price
When does excess demand happen
when the quantity of a good or service demanded exceeds to quantity supplied
What is the price floor
The minimum price set by the government that must be paid for a good or service in order to prevent prices falling below a certain level
What are the purposes of the price floor
- protects consumers income
- ensures fair wages for workers
- prevents market prices from being too low
What is the price ceiling
The maximum price set by the government that can be set for a good or service in order to prevent prices from rising to a certain level
Purposes of the price ceiling
- protects consumers from excessive pricing
- ensures affordability of essential goods
- aims to control inflation
What does elasticity measure
Measures how much one variable responds to a change in another variable
Price elasticity of demand calc
% change in quantity demanded/ % change in price
What does price elastic mean
less then one, sensitive to price changes
What does price inelastic demand mean
More then one, not very sensitive to price changes
Income elasticity of demand calc
% change in quantity demand/ % change in income
What does income elastic means
More then 1, as income rises demand increases
What does income inelastic means
More then 0 less then 1, demand increases with income but at a slower rate
What does a decrease in income elasticity mean
less then 0, demand decreases as income rises
Factors affecting elasticity of demand
- availability of substitutes
- necessity or luxury
- time period
- proportion of income spent on the good
Elasticity of supply calc
% change in quantity supplied/ % change in price
Factors affecting supply elasticity
- time to produce
- flexibility of producers
- availability of inputs
Elasticity and pricing strategy
Helps businesses decide on price changes e.g would it be suitable and sustainable
Elasticity and taxation
Governments use this to predict effect of taxes
Elasticity and revenue implication
Determines whether raising prices will increase or decrease total revenue
Elasticity and policy decisions
Informs how interventions e.g subsidies or taxes will impact supply and demand
