Markets Flashcards
Why is the demand curve sometimes āSā shaped?
Sometimes people confuse price as a signal of quality - more likely to buy at a higher price because think that implies higher quality.
Why is the supply curve upward sloping?
Costs of production increase as quantity increases so suppliers need higher prices to be persuaded to produce more output
What causes supply to shift?
Change in price of a substitute, change in cost of production, unexpected event, change in profitability of goods in joint production, technology, government internvention such as regulation, taxation on amount can produce, permits etc, expectations of prices.
Why may supply curves become disjointed?
If capacity is reached e.g in a stadium for example and supply is expanded.
Whats a free market?
Market whereby supply and demand is free of any intervention. Prices allocate resources and markets adjust to equilibrium.
What reasoning supports why the law of demand exists?
Substitution effect whereby as good gets more expensive people substitue with cheaper alternatives or the income effect - as goods become more expensive consumers have less income to spend on extra goods.
What causes demand to shift?
Change in price of substitute/complement, consumer incomes (depends on whether normal or inferior), tastes and expectations of future prices.
Define PED?
Measures the impact of a proportional change in price on the proportional change in quantity demanded.
PED formula?
(Change in Q/ Change in P) x (P/Q)
What is assumed about elasticity along the demand curve?
It is different at each point on the curve - expected to be elastic at higher prices and inelastic at lower prices.
What factors affect PED?
Number of substitues, type of good (luxury or necessity), branding, switching costs (e.g exit fee in mortgages, commitment to a complementary product, ease of comparison between products and brands, time period
What factors determine PES?
Number of producers, ease of entry, spare capacity, ease of switching production, ease of storage, length of production time.
What is cross price elasticity of demand?
Measures the responsiveness of a proportional change in price of good a to the proportional change in quantity demanded of good b.
What is the formula for CED?
(Change in the quantity demanded of good b/ Change in the price of good a) a P/Q
What does it mean if CED>0 and CED<0. What if the CED=0 or is close to 0?
if greater than 0 then substitutes if less than 0 then compliments. if 0 or very close then there is little-no relationship between the 2 goods.
