2:Price determination in a competitive market Flashcards
Competitive market
A market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market.
Equilibrium price
The price at which planned demand for a good/service exactly equals planned supply.
Supply
Quantity of a good/service that firms are willing and able to sell at given prices in a given period of time/
Demand
Quantity of a good/service that consumers are willing and able yo buy at given prices in a given period of time
Effective demand
The desire of a good/service backed by an ability to pay
Market demand
Quantity of a good/service that all the consumers in a market are willing and able to buy at different market prices.
Condition of demand
A determinant of demand, other than the good’s own price, that fixes the position of the demand curve
Normal good
Demand increases as income rises and demand decreases as income falls
Inferior good
Demand decreases as income rises and demand increases as income falls
Elasticity
The proportionate responsiveness of a second variable to an initial change in the first variable
Price elasticity of demand
Measures extent to which the demand for a good changes in response to a change in the price of that good
PED=Percentage change in quantity demanded divided by percentage change in price
Income elasticity of demand
Measures extent to which demand for a good changed in response to a change in income
IED=Percentage change in quantity demanded divided by percentage change in income
Cross-elasticity of demand
Measures the extent to which the demand for a good changes in response to a change in the price of another good
CED=Percentage change in quantity demanded divided by percentage change in price of other good
Market supply
Quantity of good/service that all firms plan to sell at given prices in a given period of time
Profit
Difference between total sales revenue and total costs of production
Total revenue
Money a firm receives from selling its output
TR=Price X quantity sold
Conditions of supply
Determinants of supply, other than the good’s own price, that fix the position of the supply curve
Price elasticity of supply
Measures extent to which the supply of a good changes in response to a change in the price of that good
Equilibrium
A state of rest or balance between opposing forces
Disequilibrium
A situation in a market when there’s excess supply or excess demand
Market equilibrium
When planned demand =planned supply and the demand curve crosses the supply curve. No excess demand or excess supply in the market.
Market disequilibrium
Exists at any price other than the equilibrium price. Either excess demand or excess supply exists in the market. Excess demand causes price to rise until a new equilibrium is established. Excess supply causes market price to fall until equilibrium is achieved.
Excess supply
When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price
Excess demand
When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price
Joint supply
When one good is produced, another good is also produced from the same raw materials
Competing supply
When raw materials are used to produce one good they can’t be used to produce another good
Complementary good
A good in joint demand, or a good which is demanded at the same time as the other good
Substitute good
A good in competing demand, namely a good that can be used in place of the other good
Composite demand
Demand for a good which has more than one use
Derived demand
Demand for a good which is an input into the production of another good
Merit good
A good which when consumed leads to benefits which other people enjoy, or a good for which the long-term benefit of consumption exceeds the short-term benefit enjoyed by the person consuming the merit good.
