Flashcards in Product market Deck (26):
when is PED/PES perfectly inelastic?
when is PED/PES inelastic?
between 0 and -1
when is PED/PES unit elastic?
when is PED/PES elastic?
between -1 and -infinity
when is PED/PES perfectly elastic?
name 5 factors that change how elastic PED is
1. substitutability of the good (more substitutes -->more elastic)
2. necessity for the good (necessities are more inelastic)
3. short run vs long run (demand more elastic in long run)
4. proportion of income (bigger proportion means more inelastic)
5. habit goods (more inelastic)
name 4 factors that affect elasticity of supply
1. level of spare capacity (working below capacity means very elastic)
2. sustainability of factors of production (if easily switchable, elastic)
3. Stock (if there is a lot, firm can quickly ship it out - elastic)
4. time (in LR they can switch multiple factors of production, so more elastic than in SR)
YED < 0 when
0 < YED < 1 when
YED > 1 when
YED > 0 when
normal good (goods whose demand increases when real incomes rise)
the responsiveness of a q demanded of a good/service to a change in price of another good/service
what is the equation for XED
% change in Q of good A / % change in price of good B
what does a negative XED mean
what does it mean if XED = 0
what are the three functions of the price mechanism
1. incentive - prices provide agents with incentives to alter their behaviour e.g. higher prices incentivise firms producing more
2. rationing - allocation of scarce resources
3. signalling - prices signal information to consumers and firms about a market
define effective demand
when a consumers desire to buy a good is backed up by his ability to afford it
what is derived demand
when a good or factor of production e.g. labour is demanded because of demand for other goods
what is a giffen good?
where increase in price of the basic item leads to an increase in demand - because the very poor cannot afford to buy other goods
what do you call a good where an increase in price leads to an increase in demand because people now believe it is better?
an ostentatious good
what is composite demand
a good demanded for by multiple different uses
what is joint demand?
goods bought together
what causes shifts in demand?
2. quality of good
4. substitutes and complements
what causes shifts in supply?
1. decrease in cost of production
2. more firms enter the market
3. investment in capacity
4. related supply
6. tech improvements
7. lower taxes
8. govt subsidies
what is the substitution effect
if a good increases in price, it will become relatively more expensive, and consumers will switch to other cheaper goods