Chapter 3 Flashcards
(12 cards)
factors of demand
The price of substitute goods;
The price of complementary goods
Personal disposable income
Interest rates
Tastes and preferences
Population size.
A rightward shift of a demand curve may be caused by:
An increase in the price of a substitute good
A fall in the price of a complementary good
An increase in personal disposable income
A reduction in interest rates
A successful advertising campaign
An increase in population size
factors of supply
Costs of productions
Technology
Taxes
subsidies
weather
prices of other goods
num of firms in an industry
PED
Price elasticity of demand (PED) is defined as the responsiveness of quantity demanded to a change in price.
The factors that affect price elasticity of demand
Substitutability
Percentage of income
Necessities or luxuries
Habit-forming/addictive goods
Time
If the outcome of a PED calculation is greater than 1 demand is what
elastic
If the outcome of a PED calculation is less than 1, demand is said to be
inelastic
The factors that affect price elasticity of supply
The availability of stocks
Spare production capacity
The ease of switching between alternative methods of production
Time
The availability of stocks (factor of PES)
supply will be very sensitive to changes in price if significant stocks are available. If stocks are scarce, supply cannot respond quickly to changes in price and hence quantity supplied is very insensitive to changes in price;
Spare production capacity (factors of PES)
if a firm is operating well below full capacity, it can very quickly respond to an increase in demand by increasing its supply. In this instance, as supply responds immediately, quantity supplied will be very sensitive to a change in price. On the other hand, if a firm is operating close to full capacity, it cannot immediately respond to an increase in demand by increasing its supply. In this instance, as supply adjusts very slowly, quantity supplied will be very insensitive to a change in price;
The ease of switching between alternative methods of production (factors of PES)
if a firm can quickly and effectively switch between the use of capital and labour in production, it can very quickly respond to an increase in demand by increasing its supply. In this instance, as supply responds immediately, quantity supplied will be very sensitive to a change in price. On the other hand, if a firm has no choice but to use a specific factor of production, and all factors of production are employed, it cannot immediately respond to an increase in demand by employing a substitute factor of production. In this instance, as supply adjusts very slowly, quantity supplied will be very insensitive to a change in price;
Time (factors of PES)
it takes time for firms to respond to changes in demand. The speed with which a firm can meet changes in demand with changes in supply depends upon the industry in which the firm is operating. In agricultural crop markets, it is not possible to miraculously produce crops out of nowhere as a certain lead time is required for planting and harvesting. In this instance, as supply adjusts very slowly, quantity supplied will be very insensitive to a change in price. On the other hand, if farmers are made aware that next year’s demand for crops will be much higher, farmers can plan ahead and meet the additional demand with additional supply. In this instance, as supply responds immediately, quantity supplied will be very sensitive to a change in price.
