1.2 Flashcards
(78 cards)
What is the definition of demand?
The quantity of a good or service that consumers are willing and able to buy at a given price, over a period of time.
This definition highlights both willingness and ability to purchase.
What does the Law of Demand state?
As price falls, demand rises (inverse relationship).
This law illustrates the fundamental economic principle of demand.
What is the shape of the demand curve and why?
Downward sloping due to:
* Income effect (more real purchasing power)
* Substitution effect (cheaper compared to alternatives)
These effects influence consumer behavior as prices change.
What is the difference between a movement along the demand curve and a shift of the demand curve?
Movement along = change in price; Shift of demand = change in non-price factors.
Non-price factors include income, consumer tastes, population size, price of substitutes or complements, and expectations of future prices.
What is the definition of supply?
The quantity of a good or service that producers are willing and able to sell at a given price, over a period of time.
This definition emphasizes the role of producers in the market.
What does the Law of Supply state?
As price rises, supply rises (positive relationship).
This law indicates a direct correlation between price and quantity supplied.
What is the shape of the supply curve and why?
Upward sloping due to:
* Higher price = more profit motive
* Covers increasing costs of production
These factors encourage producers to supply more at higher prices.
What is the formula for Price Elasticity of Demand (PED)?
PED = % change in QD / % change in Price
This formula calculates how responsive demand is to price changes.
What are the categories of PED values and what do they signify?
PED Value | Description
> 1 | Elastic (Luxury goods, branded items)
< 1 | Inelastic (Necessities, petrol)
= 1 | Unitary elasticity
= 0 | Perfectly inelastic
∞ | Perfectly elastic
Understanding different PED values helps in pricing strategies.
What factors affect Price Elasticity of Demand (PED)? ANT%
Factors affecting PED:
* Availability of substitutes
* Necessity vs luxury
* Time period
* % of income spent on the good
These factors determine how consumers respond to price changes.
What is the formula for Price Elasticity of Supply (PES)?
PES = % change in QS / % change in Price
This formula measures how responsive supply is to price changes.
What factors affect Price Elasticity of Supply (PES)?
Factors affecting PES:
* Time (more elastic in long run)
* Spare capacity
* Flexibility of production
* Stock levels
These factors influence how quickly producers can respond to price changes.
Fill in the blank: The demand curve is __________ sloping.
Downward
This reflects the inverse relationship between price and quantity demanded.
Fill in the blank: The supply curve is __________ sloping.
Upward
This illustrates the positive relationship between price and quantity supplied.
True or False: A shift of the demand curve occurs due to changes in price.
False
A shift occurs due to changes in non-price factors.
True or False: Higher prices lead to lower supply according to the law of supply.
False
Higher prices lead to an increase in supply according to the law of supply.
What is market equilibrium?
Where demand = supply
It determines the market price and quantity traded.
What happens when there is a surplus?
Price too high → Qs > Qd
This indicates excess supply in the market.
What occurs during a shortage?
Price too low → Qd > Qs
This indicates excess demand in the market.
What are the components to label in a market equilibrium diagram?
- Demand (D) curve
- Supply (S) curve
- Equilibrium price (P*)
- Equilibrium quantity (Q*)
What causes an increase in demand?
- Income ↑
- Tastes change
What is the result of an increase in demand?
P ↑ and Q ↑
What causes a decrease in supply?
Cost of production ↑
What is the result of a decrease in supply?
P ↑ and Q ↓
