Economics Flashcards
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
What is a supply curve shift?
When supply changes due to something other than price.
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price pointHigher Equilibrium GDPNumber of sellers increases - market can get floodedExamples: Government subsidies or technology improvements that decrease costs for suppliers
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price pointLower Equilibrium GDPCost of producing item increases Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
What is a Demand Curve Shift?
When demand changes due to something other than price.
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price pointPrice of substitutes go up - price of beef rises- so people buy more chickenFuture price increase is expected - War in Middle East- people go out and buy gasMarket expands - i.e. people get new free health care plan- demand at clinic risesExpansion - more spending increases equilibrium GDP
What is a Negative Demand Curve Shift (Shift Left)?
Demand decreases at each price point.Price of complement goes up - price of beef goes up- less demand for ketchupBoycott - Company commits social blunder- consumers boycottConsumer income rises - Demand for inferior goods drops as people have more money to spendConsumer tastes changeContraction - less spending decreases equilibrium GDP
What is the Marginal Propensity to Consume?
How much you spend when your income increasesCalculate: Change in Spending / Change in Income
What is the Marginal Propensity to Save?
How much you save when income increasesCalculate: Change in Savings / Change in IncomeAlso equals 1 - Marginal Propensity to Consume
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases- the demand curve increases (shifts right).
How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.One consumer spends money- which:Increases the income of a businessIncreases the income of a vendorIncreases income of employeesIncreases tax revenue
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreasesPrice decreases- Revenue increases
What conditions would indicate Elastic Demand?
Many substitutes (luxury items)Considered elastic if elasticity is greater than 110% drop in demand / 8% increase in price : 1.25 (Elastic)Price increases- Revenue decreasesPrice decreases- Revenue increases
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increasesPrice decreases- Revenue decreases
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline)Considered inelastic if coefficient of elasticity is less than 15% drop in demand / 10% increase in price : .5 (inelastic)Price increases- Revenue increasesPrice decreases- Revenue decreases
What is Unitary Demand?
Total revenue will remain the same if price is increasedConsidered unitary if coefficient of elasticity : 1
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in IncomeNormal goods greater than 1 (demand increases more than income)Inferior goods less than 1 (demand increases less than income)
What conditions occur under periods of inflation?
Interest rates increaseReduced demand for loansReduced demand for houses- autos- etc.Value of bonds and fixed income securities decreaseInferior good demand to increaseForeign goods more affordable than domesticDemand for domestic goods decrease
What happens under Demand-Pull inflation?
Overall spending increasesDemand increases (shifts right)Market equilibrium price increases
What happens under Cost-Push inflation?
Overall production costs increaseSupply decreases (shifts left)Market equilibrium price increasesNote: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
What is Optimal Production?
When Marginal Revenue : Marginal Cost
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.