Microeconomics
Define price elasticity of supply
a measure of the responsiveness of the quantity supplied to a change in price
What is the "market equilibrium"?
a situation in which quantity demanded equals quantity supplied
What is "quantity supplied"?
the amount of a good or service that a firm is willing and able to supply at a given price
What is "quantity demanded"?
the amount of a good people are able and willing to buy during a specific time period and at a given price
Define price elasticity of demand.
The percentage change in quantity demanded that results from a percentage change in price.
Mention two determinants of the price elasticity of demand.
- Availability of substitutes - Proportion of income spent
Provide two examples of goods or services with price elastic demand.
- Coffee - Diamonds
What is the main determinant of the price elasticity and supply?
- Length of production period - The availability of spare capacity
Provide two examples of goods or services with price inelastic demand
- Petrol - Medicine
What is the income elasticity of demand for normal goods and for inferior goods?
- Substitute goods: The cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases. - Complement goods: The cross elasticity of demand for complementary goods is negative. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.
Provide two examples of luxury goods.
- diamonds - handbags
Provide two examples of normal goods.
- food -clothing
Provide two examples of inferior goods.
- instant noodles - canned food
Provide two examples of necessity goods.
- medicine - water
Mention two factors that can shift the supply curve.
1- price of input
Mention 2 factors that can shift the demand curve
1. Price of related goods 2. Income 3. The number of buyers
Define complement of a good or service.
A complement of a good or service is when they are used together, such that when the price of one good decreases, then the demand for the other good increases. For example, tennis rackets and tennis balls.
What is a shortage?
A situation in which quantity demanded is greater than quantity supplied
What is a surplus?
A situation in which quantity supplied is greater than quantity demanded
Define substitute of a good or service
A substitute of goods and services that can be substituted for another when the price of one of the goods or services increases, the purchase and demand for the other good or service increases. For instance, if the price of coke increases then the demand for pepsi will increase as it is a substitute which offers a similar experience at a lower price (less of the income is spent)
What is a necessity good?
Income elasticity between 0 to 1, products and services that consumers will buy regardless of changes in their income levels.
State the law of demand
People do less of what they want to do as the cost of doing it rises.
Define income elasticity of demand.
Percentage change in quantity demanded that results from percentage change in income.
What are "opportunity costs"?
The opportunity cost of an activity is the value of what must be forgone in order to undertake the activity. Example: Opportunity Cost of studying for the Micro exam is watching a football game or reading a book or studying for another course.
What is the relationship between price elasticity of demand and total revenue?
When demand is inelastic (price elasticity ), price and total revenue have a positive relationship, which means that as price rises, total revenue rises as well. 2. When demand is elastic (price elasticity ), price and total revenue have a negative relationship, meaning that price rises lead to lower total revenue.
What is a normal good?
a good for which, other things equal, an increase in income leads to an increase in demand
What is a luxury good?
a luxury good is a good for which demand increases more than proportionally as income rises.
Define cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good
What is an inferior good?
goods that consumers demand less of when their incomes rise