Extensions of Demand and Supply Analysis

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Flashcards covering extensions of demand and supply analysis.

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34 Terms

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Price elasticity of demand

Measures the responsiveness of quantity demanded to changes in price and helps suppliers in decision-making.

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Modest changes in P cause very large changes in Qd

Relatively elastic

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Substantial changes in P cause small changes in Qd

Relatively inelastic

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Midpoint formula

It averages the two prices and the two quantities as the reference points to compute percentages.

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Elastic demand

When %ΔQ > %ΔP

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Inelastic demand

When %ΔQ < %ΔP

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Unit elasticity

%ΔQ = %ΔP

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Perfectly inelastic demand

%ΔQ=0

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Perfectly elastic demand

%ΔP=0

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Total revenue

Price (P) of product times quantity demanded (Qd)

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Inelastic

Changes in P, “direct changes in TR

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Elastic

Changes in Q, “direct changes in TR

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Unit elastic

TR remains the same

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Substitutability

The larger the number of substitute goods available, the greater the Ed, ceteris paribus.

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Proportion of income

The higher the price of a good relative to consumers’ incomes, the greater Ed, ceteris paribus.

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Luxuries versus necessities

The more a good is considered to be a ‘luxury rather than a ‘necessity’, the greater is the Ed.

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Time

Product demand is more elastic the longer the time period under consideration.

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Price elasticity of supply

Measuring responsiveness (sensitivity) of producers to price changes.

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Relatively elastic

Modest changes in P cause very large changes in Qs

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Relatively inelastic

Substantial changes in P cause small changes in Qs

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Perfectly inelastic

Not enough time to shift resources

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Inelastic supply

Resources not easily shifted to alternative uses

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Relatively elastic

Resources easily shifted to alternative uses

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Cross-elasticity of demand

measures how sensitive consumer purchases of one product (say X) are to a change in the price of some other product (say Y).

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Substitute goods

Two different types of cool drinks

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Substitute goods

↑ price of Y ↓ Qd of Y ↑ Qd of X

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Complementary goods

↑ price of Y ↓ Qd of Y ↓ Qd of X

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Independent goods

↑ price of Y ↓ Qd of Y Qd of X = 0

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Income elasticity of demand

Measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.

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Normal goods

↑ income  ↑ Qd of X

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Inferior goods

↑ income ↓ Qd of X

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Consumer surplus

The benefit surplus received by a consumer or consumers in a market

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Producer surplus

The benefit surplus received by a producer or producers in a market

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Efficiency losses

The reductions of combined CS and PS associated with underproduction or overproduction of a product.