block 2 - demand, supply and the market Flashcards
(24 cards)
what does the market demand for a good show
the quantity of the good buyers are willing and able to buy at each price
what is the market supply of a good
shows the quantity of a good that sellers are willing to produce and offer for sale at each price
when is the term
- change in quantity demanded and quantity supplied
- chang demand and supply used
- when the price of the good itself changes
- when other determinants (other than the price of the good itself) changes == shift in the demand and supply curve
what is a competitive market in the absence of externality
it is efficient - situation where it is impossible to make one part better off without making the other party worse off
occurs when the output produced is where P = MC where the consumer and producer surplus is maximum and there is no deadweight loss
what is consumer surplus
the difference between the price consumers pay for the produce and what he is willing to pay
it is the gain to customers
what is producer surplus
the difference between the amount at which the producer is willing to supply and the actual market price the producer seceives
how may the government intervene to regulate the market
it can introduce price controls to keep prices from rising above a certain level or to keep prices from falling below a certain level
what is a price ceiling and what are the consequences
a legal maximum price a seller can charge
- imposed when the equilibrium price is regarded as too high
consequences:
1. excess demand/ shortage but price cannot rise to clear the market
2. not all benefit from a price ceiling
what is a price floor and what are its consequences
a legal minimum price charged for a product or service
- imposed if the equilibrium price is regarded as too low
- set above equilibrium price
consequence :
1. surplus result but price cannot fall to clear the market
2. in the case of agricultural price support (imposed as farm lobbies have convinced the govt that theyre not earning enough), the government will buy any surplus
what is the consequence of the presence of price controls
results in an inefficient market outcome
- loss in social surplus/ theres deadweight loss
what causes an increase in demand
- increase in price of substitutes
- decrease in price of compliments
- increase in income ( normal goods)
- decrease in income ( inferior goods)
- change in taste in favour of the good
- expect price to increase in the future
what causes demand to decrease
- decrease in price of substitutes
- increase in price of compliments
- decrease in income (normal good)
- increase in income (inferior good)
- change in taste against the good
- expect price to decrease in the future
what causes supply to decrease
- increase in factor price
- tax
- decline in technology
- expect price to increase in the future (sell less now and buy more later on)
what causes supply to increase
- decrease in factor price
- subsidy
- improved technology
- expect price to fall in the future
what does the price elasticity of demand measure
measures the responsiveness of quantity demanded of a good to a change in its own price
what are characteristics of PED
- it’s negative
- its a movement along the demands curve
what is perfectly inelastic and perfectly elastic
perfectly inelastic: no change in quantity demanded when theres a change in price
perfectly elastic: quantity demanded drops to zero when price changes
what are the determinants of PED 1
- availability of substitutes:
- more substitutes = more elastic the demand
- the broader the definition, the less the substitutes - expenditure as a percentage of income
- price changes matter more when the good uses up a larger share of one’s income (more elastic) - how important it is to the customer
- luxury goods - demand elastic
- necessity - inelastic - time
- longer the time since the price change, the more elastic
- more time = more substitutes available
what is the link between PED and total revenue
revenue follows the variable that changes more
when demand elastic, total revenue follows the quantity demanded
(when price increase, quantity demanded decreases = total revenue decreases)
when demand is inelastic, total revenue follows price
(increase in price , quantity demanded decreases, total revenue increases)
what is the effect of the tax on consumer/ producer if demand is more price inelastic/ elastic than supply
demand more inelastic than supply
- consumer bears a greater tax burden since consumers are not so responsive to price changes
when supply is more inelastic than demand
- producers bear a greater tax burden
what does the cross price elasticity of demand measure
measures the responsiveness of quantity demanded of one good to a change in price of another good
(checks if 2 goods are substitutes/ compliments)
- (% change in quantity demanded of good X)/ (% change in price of good Y)
if +tve = goods the substitutes
if -ve = goods are compliments
if 0 = goods are unrelated
what does the income elasticity of demand measure
the responsiveness of quantity demanded to a change in income
( determine if a good is a normal/ inferior good)
- (% change in quantity demanded) /(% change in income)
if +ve = normal good
0<IED<1 = necessity. 0<IED>1 = luxury</IED>
if -ve = inferior good
what does the price elasticity of supply measure
the responsiveness of a quantity supplied to a change in the price of a good
- (% change in quantity supplied)/ (% change in price)
what are the determinants of PES
- spare capacity
- time (oso linked with the availability of inputs)
- factor mobility
- flexibility of production
- type of product
