1.3 price determination in a competitive market Flashcards
competing supply
when resources can be used to produce one good or another good, not both
competitive markets
a market with large numbers of buyers and sellers, low barriers to entry and exit
complementary goods
goods in join demand; these goods are often bought together
e.g. printers and ink cartridges
composite demand
demand for a multi-purpose good
condition of demand
determinant of demand other than the good’s price, that sets the position of the good’s demand curve
condition of supply
a determinant of supply other than the good’s price, that sets the position of the good’s supply curve
customer sovereignty
consumers can collectively govern production in a market via excercising spending power
strongest in perfectly competitive markets
cross elasticity of demand (XED)
measures the responsiveness of a good’s demand to a change in the price of a different good
demand
the quantity of a good or service that a consumer is willing and able to buy at a given price at a given time
derived demand
demand for a good that is the input of another good
disequilibrium
excess supply or demand in a market
effective demand
desire for a good or service that is backed by the ability to pay for said good or service
elasticity
the proportionate responsiveness of a second variable to a change in a first variable
equilibrium
no excess supply or demand in a market
a state of balance between opposing forces
equilibrium price
the price where planned demand matched planned supply
excess demand
when consumers want to buy more than producers are willing to sell; occurs below equilibrium price
excess supply
when producers want to sell more than consumers are willing to buy; occurs above equilibrium price
exchange
trading objects of value, utilising media of exchange e.g. money
income elasticity of demand (YED)
measures the responsiveness of a good’s demand to a change in the income of consumers
inferior good
a good for which demand rises as incomes fall
joint supply
when one good is produced, another good is also produced from the same raw materials
normal good
a good for which demand rises as incomes rise
price elasticity of supply
measures the responsiveness of a good’s supply to a change in price
producer sovereignty
producers determine what is produced and the prices charged
substitute good
a good in competing demand; a good that can be used in place of another similar good
supply
quantity of a good or service that a producer is willing and able to sell at a given price at a given time
6 factors which influence PED
necessity
addiction and habit
availability of substitutes
brand loyalty
proportion of income
time period
acronym to remember factors which influence PED
NASBIT
how being a necessity influences PED
necessity - needed to live lies
luxury - not needed but nice to have
necessity is unresponsive to change in price (inelastic)
luxury is responsive to change in price (elastic)
how availability of substitutes affects PED
fewer subs, more likely to be inelastic
more subs, elastic
how addiction and habit affects PED
cigarettes more likely to be inelastic, consumers forced by addiction to always consume similar quantity so demand won’t be responsive to a change in price
broccoli more likely to be elastic, consumers can easily switch to alternative vegetable
habits of using and consuming lead to addiction
hard to break habitual behaviour even if price changes
how brand loyalty affects PED
strong brand loyalty - inelastic
consumers continue to demand because they don’t buy for price, they buy for brand, more responsive
weak brand loyalty - elastic
consumers aren’t concerned about price, less responsive
how proportion of income affects PED
higher % of income, likely to be more elastic as a change in price is likely to affect the consumer more
inelastic - smaller % of income as there is smaller impact on consumers
how time period affects PED
in short run demand is inelastic as there is less time to consider alternatives
long run is more elastic as more time to consider more alternatives
perfectly inelastic demand
price has no effect on QD
example of perfectly inelastic demand
life saving drugs and addictive drugs
a patient who needs the drug to save their life will continue to demand the same quantity of medication, they’ll be completely unresponsive to a change in price
addiction will force them to continue to buy the drug
perfectly elastic demand
can occur when there is lots of competition
consumers are very responsive to a change in price
PED = - infinity
unitary elastic demand
to % change in QD is the same as the % change in price
PED = -1
price elasticity of demand
measures how much quantity demanded will respond to a change in price
PED formula
% change in QD / % change in price
what value will PED always be?
negative
