(1) Chapter 2 - Price Determination in a Competitive Market Flashcards
What is a COMPETITIVE MARKET?
A market where a large number of buyers and sellers possess good market information + can easily enter and leave
What is EQUILIBRIUM PRICE?
A price where demand exactly equals planned supply
What is SUPPLY?
Quantity of a good/service that a firm is willing and able to sell at a given price
What is DEMAND?
Quantity of a good/service that a consumer is willing and able to buy at a given price
What is EFFECTIVE DEMAND?
The desire for a good/service backed by the ability to pay
What does an INCREASE IN DEMAND show?
A rightward/upward of the demand curve
What does a DECREASE IN DEMAND show?
A leftward/downward shift in the demand curve
What is a NORMAL GOOD?
A good where the demand mimics the fall/rise of income
What is an INFERIOR GOOD?
A good where if income rises, demand falls.
If income falls the demand increase.
Eg Tesco Value products
What is meant by ELASTICITY?
The proportionate responsiveness of a second variable from the change in the first variable
What is meant by PRICE ELASTICITY OF DEMAND?
How much the demand for a good changes in response to a change in price
How do you calculate PRICE ELASTICITY OF DEMAND?
Price elasticity of demand =
Percentage change in quantity demanded /
Percentage change in price
How do you calculate INCOME ELASTICITY OF DEMAND?
Income elasticity of demand =
Percentage change in quantity demanded /
Percentage change in income
How do you calculate CROSS-ELASTICITY OF DEMAND?
Percentage change in quantity of A demanded /
Percentage change in price of B
What does PERFECTLY ELASTIC DEMAND look like?
A straight horizontal line
What does COMPLETELY INELASTIC DEMAND look like?
A straight vertical line
What type of ELASTICITY will a good have if there are close substitutes available?
The demand for the product is highly elastic