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Economics > Topic 3 - How prices are determined > Flashcards

Topic 3 - How prices are determined Flashcards

(66 cards)

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1
Q

Define Demand

A

The quantity of a good or service that consumers are willing and able to buy at a given price and a given time period

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2
Q

What is the law of demand

A

The inverse relationship between quantity demanded for a product and the price of a product. e.g. when price increases demand decreases

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3
Q

Draw a demand curve for 3 different price points

A

Demand curve slopes Down

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4
Q

What is a movement and different types

A

A movement is moving from one point of the curve to another.
- Contraction is to the left
- Expansion is to the right

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5
Q

How are movements caused

A

By changes in price.

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6
Q

What is a shift

A

When the curve moves to the left or right

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7
Q

How are shifts caused

A

By changes in factors that affect demand or supply for a good or service

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8
Q

Factors that influence demand

A

P - Population
I - Income
R - Related goods
A - Advertising
T - Tastes and Fashion
E - Expectations
S - Seasons

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9
Q

Explain how population influences demand

A

The larger the population, the higher the demand.
Also by changes in population structure e.g. more elderly

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10
Q

Explain how income influences demand

A

Consumers can afford more items if they have more disposable income, hence demand rises.

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11
Q

Explain how related goods (substitutes) influences demand

A

Substitute products refer to items that can replace another good.
If the price of a substitute falls then the Qd of the original food will fall as consumers switch to the cheaper option

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12
Q

Explain how related goods (complements) influences demand

A

A complement good is a good that goes with another good.
If the price of one good increases then the demand for the complementary good will fall.

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13
Q

Explain how advertising influences demand

A

It will increase consumer loyalty to a product, and increase demand because they may want to buy the item again and again

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14
Q

Explain how tastes and fashion influences demand

A

If a consumer tastes change, the demand curve will shift.

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15
Q

Explain how expectations influences demand

A

People will stock up today even if the price has not changed yet because they expect prices to grow in the future, shift to the right

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16
Q

Explain how seasons influences demand

A

Demand can change for certain products with different seasons.

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17
Q

If demand increases the curve will….

A

Shift to the right

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18
Q

If demand decreases the curve will…

A

Shift to the left

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19
Q

Define Supply

A

The quantity of goods or services that firms are willing and able to supply and sell at particular price during a specific time period

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20
Q

What is the law of supply

A

It dictates that as prices rise, more producers will be willing and able to produce and supply the product as there is more money to be made

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21
Q

Which way do supply curves slope and why

A

They slope upwards because:
- When prices rise, it becomes more profitable for businesses to supply the good, hence supply grows
- Higher prices encourage firms to enter the market because it seems more profitable so supply increases
- While output of the business increases, the firm’s production costs increase, so they charge a higher price to cover the costs

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22
Q

Draw a supply curve

A
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23
Q

Draw a shift in supply

A
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24
Q

Name the Factors which influence supply

A

P - Productivity
I - Indirect taxes
N - Number of firms
T - Technology
S - Subsidies
W - Weather
C - Cost of production

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25
Explain how productivity influences supply
Increased productivity causes the supply curve to shift to the right because average cost falls
26
Explain how indirect taxes influences supply
Taxes increase costs for the firm so the supply curve moves to the left. The government may also introduce new regulations that increase cost and decrease supply
27
Explain how number of firms influences supply
The more firms there are, the larger the supply, as more firms will lead to more units being supplied at every price, shifting the curve to the right
28
Explain how technology influences supply
More advanced technology increases output, and therefore moving the supply curve to the right
29
Explain how subsidies influences supply
Money given to fund the production of certain products by the government will reduce costs, and therefore increase supply, moving the supply curve to the right
30
Explain how weather influences supply
Certain weather can increase or decrease production.
31
Explain how cost of production influences supply
If production costs decline, the firm will be able to supply more, shifting the curve to the right.
32
An increase in supply will cause the curve to...
shift right
33
A decrease in supply will cause the curve to...
shift left
34
Define the Equilibrium price
The price at which quantity of a good that consumers want to buy is equal to the quantity that producers want to sell.
35
When does excess demand occur
When price is set below market equilibrium
36
What is an excess of demand
It is a shortage in the market
37
What is the effect of excess demand
It will push prices up and trigger firms to supply more. Since the prices increase, demand will decrease.
38
When does excess supply occur
When the price is set above market equilibrium
39
Effect of excess supply
There is an abundance of supply so firms reduce prices to try and sell their unsold goods.
40
Define Price Elasticity of Demand
It measures the responsiveness of a change in demand to a change in price
41
What is the formula for PED
PED = % Change in quantity demanded // % Change in price
42
Perfectly Inelastic demand
PED value = 0 There is no change in demand at all Higher prices = higher revenue, lower prices = lower revenue
43
Inelastic demand
PED value = 0-1 Change in demand less than change in price Increase price = Increased revenue
44
Unitary demand
PED value = 1 Equal changes to both demand and price No impact on revenue
45
Elastic demand
PED value = greater than 1 Change in demand higher than change in price Higher prices = lower revenue, Lower prices = Higher revenue
46
Perfectly Elastic demand
PED value = infinity Any change at all kills all demand Any changes in price = zero revenue
47
Name the factors that affect PED
D - The durability of goods A - Addictive goods S - Substitutes I - Income N - Necessities T - Time
48
Explain how the durability of goods affects PED
The demand for long lasting goods is more elastic since consumers wait long periods of time to buy another
49
Explain how addictive goods affects PED
Addictive and habit forming goods are inelastic regardless of whether they take up a large percentage of income.
50
Explain how substitutes affects PED
The availability of substitutes can greatly determine whether the good is elastic or inelastic. The better the substitute the higher the elasticity of demand. This is because it is easier for the consumer to switch consumption to a cheaper good. If there is little or no substitutes available, demand will become more inelastic.
51
Explain how income affects PED
If a good occupies a significant proportion of a person's income then it is elastic. If the good takes up a small percentage of an individuals profit then it will be inelastic
52
Explain how neccesities affects PED
If a good is a necessity to live then the good is inelastic. If a good is a luxury then it is elastic as we can live without them or buy cheaper substitutes
53
Explain how time affects PED
In the short term, goods tend to be more inelastic as people have difficulty changing their spending habits. However, over time people can adjust their spending habits, leading to a more elastic demand.
54
Define Price Elasticity of Supply
It measures the responsiveness of a change in quantity supplied to a change in price.
55
What is the formula for PES
PES = % change in quantity supplied // % change in price
56
Perfectly Inelastic supply
PES value = 0 There is no change in supply at all Higher prices = higher revenue, lower prices = lower revenue
57
Inelastic supply
PES value = 0-1 Change in supply less than change in price Increase price = Increased revenue
58
Unitary supply
PES value = 1 Equal changes to both supply and price No impact on revenue
59
Elastic supply
PES value = greater than 1 Change in supply higher than change in price Higher prices = lower revenue, Lower prices = Higher revenue
60
Perfectly Elastic supply
PES value = infinity Any change at all kills all supply Any changes in price = zero revenue
61
Factors that affect PES
B - Barriers to entry S - Spare capacity S - Stock level A - Availability of FOP T - Time
62
Explain how barriers to entry affect PES
Higher barriers to entry means supply is more price inelastic because it is difficult for new firms to enter and supply in the market
63
Explain how spare capacity affect PES
There is no room to raise supply if the firm is already at full capacity. If there are surplus resources supply can be increased.
64
Explain how stock level affect PES
Firms can easily stock and boost market supply if goods can be kept, making the market more elastic. Because perishable items cannot be stored for lengthy periods of time, supply is inelastic.
65
Explain how availability of FOP affect PES
If the factors of production are more mobile then it is easier to change supply levels so supply would become elastic
66
Explain how time affect PES
Because producers cannot quickly increase supply, supply is more price inelastic in the short run. Supply becomes more price elastic in the long run

Economics (11 decks)

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