U3 AOS 1 MICROECONOMICS 2/3 Flashcards
(34 cards)
define law of demand
- as price decreases, quantity demand increases
- as price increases, quantity demanded decreases
Rational to laws of demand
as price increase, some households can no longer purchase this product. Known as “income effect”
as individuals, when price of good A increases, we find alternatives (good b) that provide similar utility at better price. (substitution effect)
products can suffer from “diminishing marginal utility”, where each additional unit consumed provide less satisfaction
Contraction vs Supply on Demand curve
Expansion / increase in demand = shift right, downwards slope
Contraction / decrease in demand = shift left , upwards slope
Contraction vs Supply on Supply curve
Expansion / increase in supply = shift right, upwards slope
contraction / decrease in supply = shift left, downwards slope
factors influencing shift in demand
- level of disposable income
- change in interest rates
- price of substitutes
- price of complementary goods
- preferences of tastes
- population and demographic changes
- change in general level of consumer confidence
define law of supply
- as price increases, quantity supplied increases vice versa
rational to laws of supply
- businesses are driven by profit. therefore as prices go up, businesses supply more as there’s more potential profit to be made
- higher price for a product increases opportunity cost of using same resources to produce different product
- producing in bulk requires lower costs of production as you increase output. thus more willingness to supply due to potential profit
Factors influencing shift in supply
- change in costs of production
- number of suppliers
- technology change
- productivity growth
- climate conditions and disruptions
Define market equilibrium
The point where the demand and supply curve meet. At this point, all demand is satisfied and there is no wasted resource for suppliers.
how an increase in demand shifts equilibrium prices
- As demand increases from d1 → d2, consumer will spend more money than before for each quantity demanded
- originally, consumers purchased Q1 items at P1, but with increase in demand, they want Q* which is greater than q1
- consumer drives prices up as those willing to spend more outbid other consumers
- overtime, suppliers expand level of production to take advantage of potential profit knowing consumers are willing to spend more
- in the end, suppliers keep producing till they hit Q2 and set price at P2 where demands of consumers satisifed and profits maximized = new equilibrium
How an increase in supply can shift the equilibrium price
- as supply increases from s - s2, suppliers willing ot supply product for each price set
- originally suppliers supplied at q1. due to change in supply conditions they supply at q*
- suppliers forced to drop prices so they arent left in excess stock and waste
- as result, consumers know suppliers are willing to sell their products for cheaper
- in turn consumers purchase more goods at cheaper prices along with price conscious buyers
- consumers take advantage of situation until suppliers reach a point where profit is subdued and cannot generate any waste
- In the end, consumers keep demanding at Q2 and set price at P2 where suppliers have no wastage and consumers are satisfied
How to write a response for moving from disequilibrium to equilibrium
- state which curve shifts and why
- state if a shortage or surplus occurs at original price
- explain how demand and supply will expand or contract until the hit equilibrium
- state new equilibrium price and quantity. higher or lower?
Price elasticity of demand (PED)
measures responsiveness of quantity demanded of g/s to a change in price of that g/s
PED EQUATION
PED = % change in quantity demanded / % change in price
PED/PES SCALES
ped / pes less than 1 = inelastic
1 exactly = unit elastic demand
more than 1 = elastic
relatively elastic demand / high elastic demand
occurs when small percentage change in price results in large percentage change in quantity demanded e.g luxury goods
Unit Elastic Demand / Unitary Elasticity of Demand
when percentage change in quantity demanded is exactly equal to percentage change in price
Inelastic demand / low elasticity of demand
occurs when large percentage change in price results in small percentage change in quantity demand
e.g gasoline
factors of demand elasticity
-degree of necessity
- availability of substitutes
- time
- proportion of income
Degree of necessity as factor of PED
RELATIVELY INELASTICDEMAND
(not very responsive to a change inprice) RELATIVELYELASTICDEMAND
(highly responsive to a change inprice)
NEED
Highdegree of necessity
Eg.Petrol, basic foods, medicalattention. WANT
Low degreeof necessity
Egluxury cars, holidays,
Availability of substitutes as factor of PED
Demand for substitutes (wool, syntehtics and butter) is usually fairly elastic is fairly elastic whilst unique products (petrol, eggs) is inelastic.
Time as factor of PED
If a quick decision needs to be made, change in price will not generate much change for demand to enter / exit market = inelastic
thus a long decision period/time gives buyers opportunity to find alternatives / substitues (elastic)
Proportion of income as factor of PED
expensive gs representing high income earned tend to generate greater elasticity demand whilst cheaper items representing low income generate lesser inelastic demand
define price elasticity of supply
measures responsiveness of quantity supplied of g/s to change in price of that g/s
