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Flashcards in BEC 5 Market influence Deck (122)
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1

Demand curve

maximum quantity of a good that consumers are willing and able to purchase at each and every price

2

Quantity demand

quantity of a good individuals are willing and able to purchase at each and every price

3

Change in quantity demanded

change in the amount of a good demanded resulting from a change in price

4

Change in demand

change in the amount of a good demanded resulting from a change in something other than the price of the good

5

Fundamental law of demand

price of a product and the quantity demanded of that product are inversely related. As the price of the product increases, the quantity demanded decreases.

6

Quantity demanded is inversely related to price for two reasons

1. Substitution effect - consumers tend to purchase less of goods when their price rises in relation to the price of other goods.
2. Income effect - prices are lowered with income remaining constant, people will purchase more of all of the lower priced products

7

Factors that shift demand curves

1. Changes in wealth
2. Changes in the price of related goods
3. Changes in consumer income
4. Changes in consumer tastes or preferences for a product
5. Changes in consumer expectations
6. Changes in the number of buyers served by the market

8

Supply curve

the maximum quantity of a good sellers are willing and able to produce at each and every price.

9

Quantity supplied

the amount of a good that producers are wiling and able to produce at each and every price

10

Change in quantity supplied

a change in the amount producers are willing and able to produce resulting from a change in price

11

Change in supply

a change in the amount of a good supplied resulting from a change in something other than the price of the good

12

Factors that shift supply curves

1. Changes in price expectations of the supplying firm
2. Changes in production costs
3. Changes in the price or demand for other goods
4. Changes in subsidies or taxes
5. Changes in production technology

13

Market equilibrium

there are no forces acting to change the current price/quantity combination

14

Changes in equilibrium

a. Effects of a change in demand on equilibrium
b. Effects of a change in supply equilibrium
c. General effects of changes in demand and supply on equilibrium

15

Market clearing

market will eventually be cleared of all excess supply and demand (no price changes)

16

Changes and effects

1. Change in Demand - 2. Change in Supply - 3. Effect on Equilibrium Quantity - 4. Effect on Equilibrium Price

1. Increase - 2. Increase - 3. Increase - 4. ?
1. Increase - 2. Decrease - 3. ? - 4. Increase
1. Decrease - 2. Decrease - 3. Decrease - 4. ?
1. Decrease - 2. Increase - 3. ? - 4. Decrease

17

Government intervention in market operations

1. Price ceilings - established below the equilibrium price which causes shortages to develop. Price ceilings cause prices to be artificially low, creating a greater demand than the supply available
2. Price floors - a min price set above the equilibrium price, which causes surpluses to develop. Price floors are min prices established by law, like min wage.

18

Elasticity of demand and supply

Elasticity is a measure of how sensitive the demand for or the supply of a product is to a change in price

19

Price elasticity of demand

% change in quantity demanded divided by % change in price

20

Measuring the price elasticity of demand

1. Point method
2. Midpoint method

21

Point method

measures the price elasticity of demand at a particular point on the demand curve

Price Elasticity of Demand = % change in quantity demand / % change in price

22

Midpoint method

measures the price elasticity of demand between any two points on the demand curve

E = ((Q2 - Q1) / (Q2 + Q1)) / ((P2 - P1) / (P2 + P1))

23

Price inelasticity

- demand for a good is price inelastic if the absolute price elasticity of demand is less than 1.0.
- The smaller amt the less elastic
- 0.0 perfect inelastic

24

Price elasticity

the absolute price elasticity of demand is greater than 1.0

25

Unit elasticity

- the absolute price elasticity of demand is equal to exactly 1
- % change in the quantity demanded caused by a price change equals % change in price

26

Factors affecting price elasticity of demand

- product demand is more elastic with more substitutes available but is inelastic if few substitutes are available
- the longer the time period, the more product demand becomes elastic because more choices are available

27

Price elasticity effects on total revenue

a. Effects of price inelasticity on total revenue - an increase in price results in a decrease in quantity demanded that is proportionally smaller than the increase in price. Revenue will increase
b. Effects of price elasticity on total revenue - an increase in price results in a decrease in quantity demanded that is proportionally larger than the increase in price. Revenue will decrease
c. Effects of unit elasticity on revenue - a change in price will have no effect on total revenue

28

Price elasticity of demand

Elastic > greater than 1 - Price UP then revenue Down - Price DOWN then Revenue UP
Inelastic < less than 1 - Price UP then Revenue UP - Price DOWN then Revenue DOWN
Unit elastic = equal 1 - Price UP then revenue same - Price DOWN the revenue same

29

Price Elasticity of Supply

Price elasticity of supply = % change in quantity supplied / % Change in price

30

Price inelasticity

Supply < 0
absolute price elasticity of supply is less than 1.0