chapter 10 - price changes Flashcards
(25 cards)
What causes price changes in a market?
Changes in demand and/or supply
What happens to price if demand increases and supply stays constant?
The price rises
What happens to price if demand decreases and supply stays constant?
The price falls
What happens to price if supply increases and demand stays constant?
The price falls
What happens to price if supply decreases and demand stays constant?
The price rises
What happens if both demand and supply increase?
Quantity increases, but price may rise, fall, or stay the same depending on which increases more
What happens if both demand and supply decrease?
Quantity decreases, but price change depends on which decreases more
What is meant by elasticity?
The responsiveness of quantity demanded or supplied to a change in price
What is price elasticity of demand (PED)?
It measures how much quantity demanded changes when price changes
What is price inelastic demand?
When demand changes little as price changes (PED < 1)
What is price elastic demand?
When demand changes a lot as price changes (PED > 1)
What factors affect price elasticity of demand?
availability of substitutes, necessity vs luxury, time, proportion of income spent
What is price elasticity of supply (PES)?
It measures how much quantity supplied changes when price changes
What is price inelastic supply?
When supply changes a little as price changes (PES < 1)
What is price elastic supply?
When supply changes a lot as price changes (PES > 1)
What factors affect price elasticity of supply?
Time to produce, availability of resources, spare capacity, ability to store stock
How do elasticities influence price changes?
More elastic markets experience smaller price changes for given shifts in demand or supply?
Why might agricultural prices fluctuate a lot?
Because supply is often price inelastic and affected by unpredictable weather
What is a volatile price?
A price that changes frequently and significantly
Why are commodity prices often volatile?
Due to inelastic supply and fluctuating demand
What is the effect of a bumper harvest on prices?
It increases supply, which lowers prices
How can poor harvests affect price?
They reduce supply, raising prices sharply
What role do expectations play in price changes?
If buyers or sellers expect prices to rise or fall, their behaviour can cause price shifts
What is derived demand?
Demand for a good or factor that results from the demand for another product
