How Markets Work Flashcards
(20 cards)
What is the Law of Demand?
It states there is an inverse relationship between price and quantity demanded.
What are the non-price factors that can shift demand?
Income, tastes, prices of related goods, advertising, population.
What is the formula for Price Elasticity of Demand (PED)?
PED = % change in quantity demanded / % change in price
What are the classifications of Price Elasticity of Demand?
Elastic (>1) vs. Inelastic (<1).
What factors influence Price Elasticity of Demand?
Substitutes, necessity vs. luxury, income share, time period.
What is the Income Elasticity of Demand (YED) for normal goods?
Positive YED.
What is the Income Elasticity of Demand (YED) for inferior goods?
Negative YED.
What is the Cross Elasticity of Demand (XED) for substitutes?
Positive XED.
What is the Cross Elasticity of Demand (XED) for complements?
Negative XED.
What does the Law of Supply state?
There is a positive relationship between price and quantity supplied.
What are non-price factors that can shift supply?
Production costs, technology, taxes/subsidies, number of firms, weather.
What is the formula for Price Elasticity of Supply (PES)?
PES = % change in quantity supplied / % change in price.
What factors influence Price Elasticity of Supply (PES)?
Spare capacity, stock levels, time period, flexibility.
What is market equilibrium?
Occurs where supply equals demand.
What is excess demand?
Shortage.
What is excess supply?
Surplus.
What are the functions of the price mechanism?
Rationing, signalling, incentivising.
What is consumer surplus?
Difference between willingness to pay and actual price.
What is producer surplus?
Difference between price received and minimum acceptable price.
What are alternative views of consumer behaviour?
Consumers may not always act rationally due to habitual behaviour, social norms, and weakness at computation.
