A-Level Economics | Demand, Supply and Elasticities
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What is a market?
a market is a place where buyers and sellers meet to exchange goods and services
What is demand?
demand is the number of goods and services that people are willing and able to buy at each price
What is the relationship between price and demand?
downward sloping (inverse relationship)
at higher prices, quantity demanded is lower because goods and services are less affordable so less people are willing and able to buy
What is diminishing marginal utility?
as quantity increases, there is a decrease in the extra satisfaction the consumer gains.
Non-price factors that shift the demand curve
PIRATES
Population
Incomes
Related goods (complements or substitutes)
Advertising
Trends (new fashion etc.)
Expectations (toilet roll during covid)
Seasons (ice cream/ holiday packages)
What is supply?
supply is the number of goods and services that firms are willing and able to sell at each price
What is the relationship between price and supply?
upward sloping (positive relationship)
at higher prices, quantity supplied is higher because there is a greater incentive for firms to sell due to the potential to make higher profits
Non-price factors that shift the demand curve
PCTWINS
Productivity
Costs of production
Technology
Weather
Indirect tax
Number of firms
Subsidies
What is elasticity?
responsiveness
0 - perfectly inelastic
1 or -1 - unit elastic
infinity - perfectly elastic
somewhat inelastic - between 0 and 1 or between 0 and -1
What is PED?
price elasticity of demand
the responsiveness of demand to a change in price
PED = % change in D/ % change in P
What is PES?
price elasticity of supply
the responsiveness of supply to a change in price
PES = % change in S/ % change in P
What is YED?
income elasticity of demand
the responsiveness of income to a change in price
PED = % change in Y/ % change in P
What is XED?
cross elasticity of demand
the responsiveness of demand of one good, to a change in price of a different good
PED = % change in D of good A/ % change in P of good B
Factors that affect PED
SANDPIT
S - number of substitutes
A - addictiveness (cigarettes)
N- necessity (electricity/ energy bills)
D - durability (sofa)
P - proportion of income (inelastic if it is something that is £1 increases by 50% to £1.50, elastic if it is something that increases by 50% from £1000 to £1500)
I
T - time (over time, the other factors change e.g. people get used to substitutes over time)