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Flashcards in Week 2 Deck (41):
1

The invisible hand

Specialised individuals need to
exchange. The market
developed as the mechanism
that organises exchange first
through barter then using
money as the medium of
exchange, store of value and
unit of account.

2

The model of the competitive market

The market is an institution where the buyers and sellers of the same good or service come together to trade

3

Assumptions of the model of the competitive market

Rational agents

Perfect information

Zero transaction cost

Flexible prices

Property rights defined and enforced

Perfect competition

4

Variables in the allocation of resources

Price (P)
Quantity (Q)

We analyse the model for equilibrium and efficiency

5

Are the assumptions unrealistic

While these assumptions are “unrealistic” simplifications, together they tell us what
conditions need to be in place to make the market work well. They serve as a benchmark
for the design and improvement of real markets.

6

The law of demand

The law of
demand states that as
the price rises, the
quantity demanded falls
and vice versa (because
consumers are relatively
worse off and substitute
into other products).

7

Demand

Demand comprises all those consumers willing and able to buy the product. How much
people buy depends on many variables, we focus on price. Demand shows how much consumers plan to
buy at every conceivable price.

8

Quantity demanded

Quantity demanded (Qd)
refers to purchasing plans at one particular price (P).

9

Demand curve

Slopes downward

Steepness reflects consumer price sensitivity

Position reflects the volume of demand

10

Demand curve and function example

Photo in favourites 26/7/18

11

Elasticity

elasticity measures the responsiveness of quantity to one of its determinants. We measure
elasticity in the steepness of the curve concerned. There are many types of demand and supply elasticity to
determinants such as price of the product, price of related products, income etc.

12

Own price elasticity

own-price elasticity of demand measures the responsiveness
of quantity demanded of a product to its price. It reflects the sensitivity or
responsiveness of consumer purchasing plans to price.

13

The steepness of the demand curve

The steepness of the demand curve is a measure of own-price
elasticity of demand. Flatter curves mean greater elasticity
(greater change in consumers’ purchasing plans), steeper
curves mean lesser elasticity

14

A product´s own-price elasticity depends on:

• availability of close substitutes
• proportion of income spent on the good
•necessities versus luxuries
• time horizon

15

PED =

Photo in favourites 26/7/18

16

Demand elasticity calculations

Photo in favourites 26/7/18

17

Demand elasticity: PED overview

Photo in favourites 26/7/18

18

Cross price elasticity of demand measures the responsiveness

cross-price elasticity of demand measures the responsiveness
of quantity demanded of a product to changes the price of another good.

19

CPED =

Photo in favourites 26/7/18

20

Demand elasticity: cross price example

Photo in favourites 26/7/18

21

Income elasticity of demand

Income elasticity of demand measures the responsiveness of quantity demanded of a product to changes in consumer income

22

Demand elasticity: income example

Photo in favourites 26/7/18

23

YED =

Photo in favourites 26/7/18

24

Supply

supply shows how much producers plan
to produce at every conceivable price. Quantity
supplied (Qs) refers to one particular price level. Supply comprises all those producers willing and able to produce the product.
How much these firms produce depends on many variables, we focus on price.

25

The law of supply

the law of
supply states that as the
price rises, the quantity
supplied rises and vice
versa (because producers
substitute out of other
products).

26

Supply curve

•slopes upward
• slope reflects
producer price
sensitivity
• position reflects
volume of supply

27

Supply function and curve example

Photo in favourites 26/7/18

28

Own price elasticity of supply

own-price elasticity of supply measures the
responsiveness of quantity supplied of a product to its
price. It reflects the sensitivity or responsiveness of
producer purchasing plans to price.

29

The steepness of the supply curve

The steepness of the supply curve is a measure of own-price
elasticity of supply. Flatter curves mean greater elasticity
(greater change in firms´ producing plans), steeper curves
mean lesser elasticity

30

A product´s own-price elasticity depends on:

•availability of inputs
• flexibility of sellers
• time horizon

31

PED

Percentage change in quantity demanded divided by percentage change in price

32

CPED

Percentage change in quantity demanded divided by percentage change in price of another good

33

YED

Percentage change in quantity demanded divided by percentage change in income

34

PES

Percentage change in quantity supplied divided by percentage change in price

35

Total expenditure example

2 Photos in favourites 26/7/18

36

What is proportional elasticity equal to

1

37

When calculating PED do you ignore the minus sign

Yes

38

Aggregation

Economists refer to the process of adding up the individual demand curves to find the market demand curve as aggregation.
Aggregation consists of fixing the price of the good
and adding up the quantity demanded by each buyer.

39

The five major factors that shift the demand curve when they change​ are:

1. Tastes and preferences
2. Income and wealth
3. Availability and prices of related goods
4. Number and scale of buyers
5.​ Buyers' beliefs about the future

40

Consumer surplus

The value or total benefits one receives from a good in excess of the price paid for it describes the meaning of consumer surplus.

41

Do all consumers in a competitive market enjoy the same amount of consumer​ surplus?

​No, since considerable variation exists among consumers in terms of tastes and incomes.