1.3 Price Determination Flashcards
What is a demand curve?
A curve showing the amount of a good consumers are willing and able to buy at each and every price level
What are products that act as an alternative for consumers
A substitute
What are things that are often bought together called
Complements
What does ceteris paribus mean?
all other factors remain the same
What are the determinants of demand
The price of the good, consumer income, prices of other goods and services, consumer tastes and fashion and other factors like advertising
What is a normal good?
one where if price rises, demand will fall
What is a Veblen good?
When price increases of a luxury goods, demand increases
What is an inferior good?
One where demand decreases as incomes increase
What is a Giffen good?
When cheap stable foods are consumed in greater quantity when their price rises
What causes a demand curve to shift to the right
An increase in demand
What causes a shift to the left of a demand curve
A decrease in demand
What are the determinants of supply
The price of a good
The impact of changing costs of production
Technological progress
Prices of other goods and services
Government policy
What is market equilibrium
The point at which demand is equal to supply
If prices rise how does that affect demand and supply
A rise in price will lead to excess supply as demand will fall
If prices fall what effect does that have on demand and supply
An excess demand will be caused as there should be an increase in demand leading to a higher demand then supply
What do market forces do
Market forces always push prices towards market equilibrium
What do complements have(cross Elasticity of demand)
They have a negative cross elasticity of demand
What do substitutes have(cross elasticity of demand)
Substitutes have a positive cross elasticity of demand
What is composite demand
An increase in demand for one good or service will restrict its availability for another use
What is derived demand
A result of demand for another good or service
What is joint supply
When the production of a product creates a by-product that can also be supplied
What is PED
The responsiveness of demand to a change in price
What is the formula for PED
%Change in demand/ %change in price
What is PED determined by
Substitutes, time, market width, luxury or necessity, percentage of income
What is YED
A measures of the responsiveness of demand to a change in income
What is the formula for YED
%change in demand/% change in income
What is YED determined by
Necessity or luxury, level of income of consumer
What is XED
A measure of the responsiveness of demand for one good, to a change in price of another good
What is the formula for XED
%change in quantity demanded of good x/ % change in price of good x
What is XED determined by
Whether the goods are substitutes, compliments or have no relationship
What is PES
A measure of the responsiveness of supply to a change in price
What is the formula for PES
%Change in quantity supplied/%Change in price
What are the determinants of PES
Price, Availability of substitutes, Spare production capacity is available, stocks, time frame, artificial limits on supply
What are the functions of price
Signalling, incentives and rationing
What is the incentives function
Profit incentive to increase supply
What is the rationing fucntion
Higher prices will tell consumers not to buy
What is the signalling function
Price and Quantity signals to consumers and producers
