2 = supply/demand how markets work Flashcards
(24 cards)
what is demand ?
quantity of a good or service that consumers are willing to and able to buy at a given price
what is supply ?
the quantity of a good or service that suppliers are willing to and able to sell at a given price
where is equilibrium price ?
where supply = demand
what happens if the market is in excess supply ?
firms should cut the price back to lower supply and get back to equilibrium, profit should also increase because sales should increase
what happens if the market has a shortage or excess demand ?
firms raise prices and increase supply to get back to the equilibrium price and make more profit.
what are the two movements along the demand curve and what are they a result of?
movements along the curve are due to the change in price.
- an extention of demand (move along to the right) is when price falls
- contraction of demand (move along the curve to the left) is when price rises
what causes the demand curve to shift to the right? and left?
right shift is an increase in demand
left shift is a decrease in demand
what factors cause the demand curve to shift ?
- compliment prices
- substitute prices
- advertising and branding
- changes in income
- social trends
- changes in age and size of population
- expetations of future prices
what are the two movements along the supply curve ?
contractions in supply (movement along and to the left) due to an decrease in price
and
extentions in supply (movements along and to the right) due to a increase in price
what factors cause the supply to shift ?
- production costs
- taxes
- subsidies
- price of substitutes
- new technology
what are the types of interelated markets ?
- compliments
- substitutes
- derived demand (one good is used to make another e.g. steel and cars)
- joint supply (two products from the same production process e.g. beef and leather)
- competitive supply (firms compete for the same resource)
what is consumer surplus ?
the difference between the price consumers are willing to pay and the price they actually pay for a good
(area above price and bellow demand curve)
what is producer surplus ?
the difference between the price producers are willing to supply a good for and the actual market price
(bellow price and above supply curve)
what is PED?
the responsiveness of quantity demanded to a change in price its calculated by the percentage change in QD / percentage change in price
What is PED elastic?
the percentage change in quantity demanded is greater than the change in price >1
what is PED inelastic ?
the percentage change in quantity demanded is less the the change in price
PED = <1
what factors determines and influence the PED?
- availability of substitutes (many subs = elastic)
- nessesity or luxury
- proportion of income spend on the good (little = inelastic)
- habit forming = inelastic
- branded goods ? = inelastic because consumers see them as unique products without alternatives
- short run demand is inelastic long run elastic (in SR we tend to stay with current suppliers, in LR we have time to source alternative suppliers and adjust our spending habits)
what are the 4 types of elasticities ?
- PED
- PES
- YED
- XED
what factors influence PES?
- the level of spare capacity (if a firm have labour and capital that are not being fully utilised they could easily increase output = elastic)
- how easily production can be switched to a different product. easily = elastic. hard = inelastic
- level of stock
- perishability of goods (goods that can be stored and not rot are more elastic)
- barriers for new firms to enter, low barries to entry = supply can easily increase
whats YED?
the responsiveness of quantity demanded to a change in income.
whats a normal good (YED)?
YED is positive and inelastic (less than one)
- e.g. potatoes
what is a luxury good (yed)?
YED is positive and elastic (more than one)
- e.g. smartphones
what is an inferior good (YED)?
YED is negative = as income increase quantity demanded decrease (tents / camping)
what is XED ?
cross elasticity of demand is the responsiveness of quantity demanded for good A to a change in price of good B.
- positive = substitutes
- negative = compliments
- inelastic = weak
- elastic = close
