Demand, Supply Etc Flashcards by Eva Keyte

Effective demand

Demand supported by intention and ability to buy

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Latent demand

Willingness to buy but not yet ability to

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Joint/complementary demand

Demand for one good is closely linked to demand for another

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Competitive demand

2 or more goods that are close subs for each other

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Derived demand

Demand for one product drives demand for another

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Composite demand

Good is demanded for more than 1 use

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Individual demand

Consumers demand for a good/service

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Market demand

All consumers demands in the market summed together

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Law of demand

Price falls, quantity demanded increases and vice versa

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Ceteris paribus

All other things being equal

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Factors causing shift in demand

changes in tastes/preferences
change in incomes
change in price of related goods (compliments/substitutes)
change in size/structure of population
changes in interest rates
changes in law
changes in expectations

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Substitution effect

Consumers substitute in favour of the good that becomes cheaper

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Real income effect

If price of good A falls, the consumer buying it will gain purchasing power, this extra ‘income’ available for spending can be used to buy more of good A

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Total utility

Total satisfaction consumer gets from purchasing units of a good
Rational consumers aim to maximise total utility

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Marginal utility

Change in total utility from consuming an extra unit of a product

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Law of diminishing marginal utility

As consumer buys and consumes more units of a good, the extra satisfaction gained diminishes
- men’s that at higher quantities consumers are less willing to pay higher price

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Joint supply

2 or more goods that derive from single production process
A change in the supple of one good leads to a change in supply of the by-product

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Individual supply

A producers supply of a good/service

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Market supply

All producers suppliers to the market summed together

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Law of supply

As p falls S falls too and vice versa

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Why does the supply curve slope upwards?

higher market prices motivate firms to supply more as they expect more profit
producing more increases marginal cost of production so firms need higher prices to cover these costs

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Factors causing shift in supply

change in cost of production
changes in tech
change in weather/climate
strikes/pandemic
changes in indirect taxes
changes in producer subsidies
changes in price of substitutes in production
changes in number of firms supplying to market

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Where does the market clear?

At equilibrium

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Define PED

The responsiveness of quantity demanded of a good to a change in its price

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PED formula

= %changeinQD / %changeinprice

Why is PED always negative?

Quantity demanded is inversely related to price

Inelastic demand

- QD not respon

Elastic demand

Unitary demand

Perfectly elastic

Perfectly inelastic

What happens to TR when there’s a rise in P if PED is elastic?

It falls

What happens to TR when there’s a fall in P if PED is elastic?

TR rises

What happens to TR when there’s a rise in P if PED is inelastic?

TR rises

What happens to TR when there’s a fall in P if PED is inelastic?

TR falls

What will TR do when price changes if PED is unitary?

Nothing

Factors influencing PED

- availability and closeness of subs - Cost of switching suppliers - degree of necessity - time frame when making a choice - brand loyalty - % of income - habits

Uses of PED

- determination of pricing policy/impact on revenue - indication of competition faced (number/closeness off substitutes) - price setting in price discrimination - gov decision on which goods to tax indirectly

Define PES

The responsiveness of quantity supplied of a good to change in its price

PES formula

= %changeinQS / %chnageinP

Inelastic supply

Elastic supply

Unitary supply

Perfectly elastic supply

Perfectly inelastic supply

Factors influencing PES

- time period - breakdowns in supply chains - Spare capacity - stock - availability of producer substitutes - ease of entry into market

Define income elasticity of demand

Responsiveness of demand for a good to a change in income

YED formula

= %changeinD / %changeinincome

Is YED + or - for normal goods

Is YED + or - for inferior goods

YED between 0 and +1

Necessity - as income rises, only relatively small increase in D

YED between +1 and +infinity

Luxury - as income rises, relatively large increase in demand

Negatives YED

Inferior good - As income rises, falling QD

What are normal goods

Products/services for which demand increases as income rises - eg. Restaurant meals, holidays

What are inferior goods

Products/services for which demand decreases as income rises - eg. Supermarket own brands

Define cross elasticity of demand

Responsiveness of demand for a good to change in price of a related good

XED formula

= %changeindemandforgoodA / %changeinpriceforgoodB

Is XED + or - for substitute goods?

Is YED + or - for complementary goods?

What kind of goods when Positive XED is between 0 and +1?

Weak substitutes

What kind of goods when Positive XED is between +1 and +Infinity?

Strong substitutes

What kind of goods when negative XED is between 0 and -1?

Weak compliments

What kind of goods when negative XED is between -1 and -infinity?

Strong compliments

Uses of YED

- effect of recession/growth on demand - business planning for product range - helps firms anticipate future demand

Uses of XED

- marketing strategies eg. Selling compliments together/ in bundles - if competitor changes price, firms can work out the effect on their demand

What are the 3 functions of price

- signalling - incentivising - rationing

Signalling

- prices provide key info to buyers and sellers - if P changed due to shift in D, producers signalled to adjust output levels - if p changes due to shift in S, indicates to consumers to re-think how much they will purchase

Incentivising

- higher P can incentivise producers to increase S as they anticipate more profit - lower p incentivises consumers to increase D as they pay less for a good yielding same utility

Rationing

- limited supply, P rises - this rations good to those most willing and able to pay

When might signalling fail?

- if there are externalities - if gov imposes max/min price - if price set by producers not at equilibrium - if there’s imperfect info

When might incentivising fail?

- may be missing for public goods

When might rationing fail?

- may not work if gov sets price

Consumer surplus

Difference between total amount consumers are willing and able to pay for good/service and the actual amount they pay. - measure of consumer welfare

Producer surplus

Difference between what producers willing and able to supply good for and they price they actually recieve - measure of producer welfare

Demand, Supply Etc Flashcards

(74 cards)