Micro Topic 3: Supply and Demand

Determinants of Demand

Population

Advertising

Substitute’s Price

Income Tax

Fashion and Trends

Interest Rates

Complement’s Price

Determinants of Supply

Productivity

Indirect Tax

Number of Firms

Technology

Subsidies

Weather

Cost of Production

Determinants of Price Elasticity of Demand

Substitutes (Number of)

Percentage of Income

Luxury/Necessity

Addictive Goods

Time Period

PED Numerical Values Meaning?

>1 = Demand is price elastic
<1 = Demand is price inelastic
0 = Demand is perfectly price inelastic
Infinity = Demand is perfectly price elastic
1 = Demand is unit price elastic

Determinants of Price Elasticity of Supply

Production Lag

Stocks

Spare Capacity

Substitutability of Factors of Production

Time Period

PES Numerical Values Meaning?

>1 = Supply is price elastic
<1 = Supply is price inelastic
0 = Supply is perfectly price inelastic
Infinity = Supply is perfectly price elastic
1 = Supply is unit price elastic

YED Numerical Values Meaning?

(+)>1 = Income Elastic: Income increases, normal good demand increases proportionately more (referred to as normal luxury)
(+)<1 = Income Inelastic: Income goes up, normal good demand increases proportionately less (referred to as normal neccesity)

(-)>1 = Income elastic: Income increases, inferior good demand decreases proportioantely more
(-)<1 = Income inelastic: Income increases, inferior good demand decreases proportionately less

XED Numerical Values Meaning?

>1 = Demand between the goods are price elastic (strongly related)
<1 = Demand between the goods are price inelastic (weakly related)
0 = Demand between the goods are perfectly price inelastic (no relationship)

Positive: Substitutes

Negative: Complements

Price Mechanism Functions

Allocation of Scarce Resources/Allocative Efficiency

Rationing of Scarce Resources

SIgnalling of Excess Demand or Excess Supply

Incentivise Producers to Increase/Decrease Output

Interrelated Markets?