2-Price determination in a competitve market Flashcards
Competitve market
a market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market
Supply
the quantity of a good or service that firms are willing and able to sell at given prices in a given period of time
Demand
the quatitiy of a good or service that consumers are willing and able to buy at given prices in a given period of time.
Effective demand
Latent demand
effective: the desire for a good or service backed by an ability to pay
latent: Not backed by ability to pay
Condition of demand
a determinant of demand, other than the good’s own price, that fixes the position of the demand curve
Increase in demand effect on demand curve?
rightward shift of the demand curve
decrease in demand effect on demand curve?
leftward shift of the demand curve
What can cause demand to shift? (7 Determinants of demand)
PIRATES
P- Population. The larger the population, the higher the demand. Changing the structure of the population also affects demand, such as the distribution of different age groups.
I- Income. If consumers have more disposable income, they are able to afford more goods, so demand increases.
R- Related goods. Related goods are substitutes or complements.
A- Advertising. This will increase consumer loyalty to the good and increase demand.
T- Tastes and fashions
E- Expectations. This is of future price changes. If speculators expect the price of shares in a company to increase in the future, demand is likely to increase in the present.
S- Seasons.
Others
- law
- interest rates
- Consumer confidence
Normal good
demand increases when income rises
inferior good
demand falls when income rises
Price elasticity of demand
measures the responsiveness of quantity demanded to a change in the price of the good
PeD= %change in quantity demanded/ %change in price
PeD for perfectly elastic demand
How it will look on a demand curve?
Infinite
Horizontal line
Fall in price leads to a huge increase in total revenue
PeD for elastic demand
How it will look on a demand curve?
PeD < -1
Shallow negative gradient
A fall in price means quantity demanded rises proprtioanlly more then the price cut, total revenue rises
PeD for unitary demand
How it will look on a demand curve?
PeD=1
Curve starts of negatively steep then goes shallow
Change in price bring about the same proprtiante change in quantity demanded
PeD for inelastic demand
PeD between 0 and -1
Steep negative gradient
When price falls, quantity demanded increases but by a smaller proportion then the fall in price, total revenue falls
PeD for completely inelastic demand
PeD=0
Vertical line
When prices fall, quantity demanded does not change at all, so total revenue falls.
Factors determining price elasticity of demand
- Availability of substitutes: Close substitutes, demand for the product is highly elastic
- Proportion of income spent on good:Big ticket items are more elastic
- Necessities or luxuries: luxuries usually have elastic demand
- Time
Income elasticity of demand
The responsiveness of quantity demanded to a change in income
YeD for inferior good?
negative