Supply and Demand

• define income elasticities of demand 


  the extent to which quantity and demand changes in relation to changes in income
• define determinants of demand


  factors that affect the quantity demanded
• state the formula for XED

  .

  A) quantity

  B) price

  
• what is true is PED=1

  demand is price unitary elastic
• a PED figure should always be

  negative - shows the relationship between price and quantity
• state the formula for PED

  .

  A) quantity

  B) change

  
• Define price elasticity of demand

  responsiveness of quantity demanded in relation to a change in price
• define ceteris paribus


  everything else remains equal
• define a substitute good 


  a competing good
• define a complementary good


  goods where there is joint demand
• define an inferior good

  a good where demand decreases as incomes increase
• define a normal good 


  a good where demand increases as income increases
• PES should always be

  positive as higher prices imply higher profits for firms
• what is true if XED is negative

  the goods are complementary
• what does a shallow gradient mean on a demand curve

  a more price elastic product - price changes have a greater effect
• what are the determinants of PED

  -availability and closeness of substitute

  -width of product definition - food vs hovis white bread

  -proportion of income spent - higher proportion means more elastic

  -time available to make the swap
• what does a steep demand curve mean

  the product is more price inelastic
• what is true if PED is <1

  the demand is price inelastic
• what is true if PED >1

  then demand is price elastic
• state the formula for YED

  .

  A) demanded

  B) income

  
• define elasticity 


  a measure to the extent buyers and sellers respond to change within the market
• list 3 factors affecting PES

  -availability of stock

  -time available

  -availability of factors of production

  -ease of firms entering the market
• what is true about the goods is XED is positive

  they are substitute goods
• state the formula for PES

  .

  A) supplied

  B) price

  
• list 4 determinants of supply

  -cost of production

  -cost of borrowing

  -state of technology

  -tax burden

  -subsidies available
• list 3 determinants of demand

  -promotion

  -tastes

  -dispoable income

  -price of compliment/ substitute
• define cross elasticities of demand

  how the quantity demanded of product a changes in relation to price changes in product b
• what is true for YED if the good is normal

  YED = positive as increases in income lead to increases in demand
• what is true for YED if the good is inferior

  YED = negative as increases income leads to fall in demand
• what is the YED for a superior good

  it is positive and greater than 1
• what is PED if the demand curve is parallel to the x axis

  perfectly price elastic

  PED=infinite
• what is PED if the curve is parallel to the Y axis

  demand is completely price inelastic

  PED = 0
• define demand 


  the quantity customers are willing to buy of a product at a given time and price
• define supply 


  the quantity firms are willing and able to supply at a given price and time
• Define PES


  the responsiveness to changes in quantity supplied in response to a change in price
• effect on revenue if price increases and demand is price elastic 


  revenue decreases
• effect on revenue if price increases and demand is price inelastic

  revenue increases
• effect on revenue if price falls and demand is price elastic

  revenue increases
• effect on revenue if price falls and demand is price inelastic

  revenue decreases
• define market equilibrium 


  where quantity demanded= quantity supplied