Week 3: demand and supply continued; elasticity Flashcards
Demand
• the relationship between a product’s price and quantity demanded
• shown using a schedule or curve
Law of demand
• states that price and quantity demanded are inversely related
Market demand
the sum of quantities demanded by all consumers in a market
Changes in Demand
• are shown by shifts in the demand curve
• are caused by changes in demand factors
5 Demand Factors
• Number of buyers
• Income
• Prices of other products
• Consumer preferences
• Consumer expectations
Number of buyers
• increase causes a rightward shift in demand
• caused by pop growth or more people wanting to buy it
Income
• normal products
• inferior products
Normal products
products that consumers demand more of as income increases
ex. expensive steak
Inferior products
products that consumers demand less of as income decreases
ex. McDonalds
Prices of other products
• substitutable products
• complementary products
Substitutable products
• products that can be consumed in place of one another
• rise in another product’s price causes a rightward shift in demand
ex. butter and margarine
Complementary products
• products that are consumed together
• rise in another product’s price causes a leftward shift in demand
ex. milk and cereal
Consumer preferences
• trends
• marketing
Consumer expectations
ex. if most consumers expect the price of laptop computers to fall, the current demand for laptops decreases
ex. if they expect their standard of living to rise—their current demand for normal products will increase, and their current demand for inferior products will decrease
Quantity Demanded
the amount of a product consumers are willing to purchase at each price
Changes in Quantity Demanded
• movements of points along the demand curve
• only change bc of price (y-axis)
Supply
• the relationship between a product’s price and quantity supplied
• shown using a schedule or curve
Law of supply
states that there is a direct relationship between price and quantity supplied
Changes in Supply
• are shown by shifts in the supply curve
• are caused by changes in supply factors
6 Supply Factors
• Number of producers
• Resource prices
• State of technology
• Prices of related products
• Changes in nature
• Producer expectations
Number of producers
an increase causes a rightward shift in supply
Resource prices
an increase causes a leftward shift in supply
State of technology
an improvement causes a rightward shift in supply
Prices of related products
an increase in the price of a related product causes a leftward shift in supply
Changes in nature
for some products, an improvement causes a rightward shift in supply
Producer expectations
an expectation of lower prices in the future causes an immediate rightward shift in supply
Quantity Supplied
the amount of a product businesses are willing to supply at each price
Changes in Quantity Supplied
• are shown by movements along the supply curve
• are caused by price changes
Law of Supply and Demand
• where both curves intersect
• customers happy with price and firms are happy to produce that product at that low price
• surplus
• shortage
Surplus
• too much supply
• price is pushed down
Shortage
• too much demand
• price is pushed up
Equilibrium
point at which demand and supply curves intersect
Price elasticity of demand
shows how responsive consumers are to changes in price
elastic demand
means that the % change in quantity demanded is more than the % change in price
ex. coffee
inelastic demand
means that the % change in quantity demanded is less than the % change in price
ex. insulin for diabetics
unit-elastic demand
• means that the % change in quantity demand equals the % change in price
• they equal each other
Perfectly elastic demand
means that there is a constant price and a horizontal demand curve (perfect competition)
Perfectly inelastic demand
means that there is a constant quantity demanded and a vertical demand curve
4 determinants of price elasticity of demand
• portion of consumer incomes
• access to substitutes
• necessities versus luxuries
• time
portion of consumer incomes
products with smaller portions more inelastic
access to substitutes
products with more substitutes more elastic
necessities versus luxuries
more inelastic for necessities and more elastic for luxuries
time
more elastic with the passage of time
> 0 to < 1
inelastic demand
1
unitary elasticity
> 1
elastic demand
