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Unit 2: The price system and the microeconomy - Coggle Diagram
Unit 2: The price system and the microeconomy
Demand and supply curves
Supply
Definition
Quantity of a product that suppliers are willing and able to sell at different prices over a period of time, ceteris paribus.
Supply curve
Positive correlation between price and quantity supplied
A causal relationship
A linear relationship
A continuous relationship
A time-based relationship
Factors affecting the curve
Costs of production and distribution
Size and nature of the industry
Change in prices of other products
Government policy
The price mechanism
Essential to allocation of resources
Sends signals from consumers to producers
Demand
Factors that affect demand
Price and availability of related products
Substitutes
Compliments
Joint demand
Fashion
Income of consumers
Taste
Price
Attitudes
Demand curve
A continuous relationship
A time-based relationship
A linear relationship
Ceteris paribus
Definition
Willing to buy
Able to buy
Buyers
Different prices
Product
Per period of time
Quantity
Ceteris paribus
Quantity of a product that buyers are willing and able to buy at different prices per period of time, ceteris paribus.
Price elasticity of supply
Formula
PES = % change in quantity supplied/ % change in price
Factors influencing PES
Availability of stocks
The time period
Productive capacity
Definition
A numerical measure of the responsiveness of the quantity supplied to a change in the price of the product.
Influencing how businesses react to changing market conditions
Sometimes businesses can hold stock until prices rise with variations in demand
Agricultural industries can't hold stock
Elasticity of demand
Income elasticity of demand
Definition
Responsiveness of quantity demanded for a product following a change in income.
Formula
% change in quantity demanded/ % change in income
Classification of goods
Necessity - close to 0
Normal - between 0 and 1
Inferior - negative
Superior - positive and greater than 1
Cross elasticity of demand
Definition
Responsiveness of quantity demanded for one product in response to a change in the price of another product.
Formula
XED = % change in quantity demanded of product A/ % change in price of product B
Classification of goods
Substitutes
Positive XED
Complements
negative XED
Price elasticity of demand
Responsiveness of the quantity demanded for a product following a change in the price.
Level
High
small price change results in big quantity change, (-2)
Low
big price change results in small change in demand (-0.2)
Formula
% change in quantity demanded/ % change in price
Special values
0 = perfectly inelastic
infinite = perfectly elastic
Factors effecting it
Availability and attractiveness of substitutes
Relative expense of the product
Time period
The interaction of demand and supply
Market equilibrium
Equilibrium price
The price where demand and supply are equal, and the market clears
Disequilibrium
Where there is either a shortage or a surplus of a good/service
Shifts
Market demand curve
Causes
Price and availability of substitutes and complements
Fashion, taste and attitudes
Inability to pay for a product
Changes in factors affecting demands other than price
Rightwards means increasing demand
Left - decreasing demand
Consumers who were previously prepared to pay more, are now only prepared to pay less for the same quantity.
Market supply curve
Causes
Government policy
Size and nature of the industry
Price changes in other products
Costs associated with supplying the product
Equipment maintenance costs
Raw material and component rpices
Changes in technology
Worker productivity
Wage rates
Distribution costs
Relationship between markets
Rationing
Signalling + The transmission of preferences
Joint supply
The provision of incentive
Derived demand
Joint demand
Alternative demand
Consumer and producer surplus
Producer surplus
Definition
The difference between the price a producer is willing to accept and what is actually paid.
Impact of price change
Extent of the price change
The price elasticity of supply
Consumer surplus
Definition
The difference between the price a consumer is willing to pay and a products market price
Impact of price change
The extent of the price change
The price elasticity of demand