2.Price determination in a competitive market Flashcards
Define supply.
The quantity of a good or service that firms are willing and able to sell at a given price.
Define demand.
The quantity of a good or service that consumers are willing and able to buy at a given price.
What is the equilibrium price?
The price at which planned demand for a good or service equals the planned supply.
Describe the relationship between demand and price (law of demand).
When the price of a good or service falls, then demand increases.
Describe movement of demand curve if demand increases.
A rightward shift of the demand curve.
Describe movement of demand curve if demand decreases.
A leftward shift of the demand curve.
What factors cause the demand curve to shift right?
The price of substitute goods (rise), The price of complementary goods (fall), Personal income (rise), Tastes and fashion, Population size (rise).
Define a normal good.
A good for which demand increases as income increases.
Define an inferior good.
A good for which demand decreases as income increases.
Define elasticity.
The responsiveness of one variable causes by a change in another variable.
Define price elasticity of demand, and its formula.
Measures consumers responsiveness to a change in a goods price. (Always a negative number).
PED=%change in quantity demanded / %change in price.
Define income elasticity of demand, and its formula.
Measures how demand responds to a change in income.
YED=%change in quantity demanded / %change in income.
Define cross elasticity of demand.
Measures how the demand for one good responds to a change in price of another good.
Define the five types of demand.
Effective demand- the willingness and ability to buy a good or service.
Latent demand- the willingness but inability to buy a good or service.
Composite demand- the demand for a good which has two or more uses.
Joint demand- the demand for two or more complementary goods satisfy the same want.
Derived demand- the demand for one good resulting from the demand for an intermediate good.
3 Factors affecting price elasticity of demand.
Substitutability- If a substitute good exists, the consumers respond to a change in price.
Percentage of income- If it is a large percentage then consumers respond to a change in price.
Necessities or luxuries- If good is a necessity then consumer will not respond to price.
If a goods PED=0, how elastic will the good be?
The good is perfectly inelastic, because the demand of the good does not respond to a change in price. (vertical curve).
If a goods PED is
The good is inelastic as it has a very small responsiveness to a change in price.
If a goods PED is >1, how elastic will the good be?
The good is elastic, because is the demand for the good responds to a change in the goods price. (horizontal curve).
What is the income elasticity of demand for a normal good?
YED is positive because as incomes rise, the demand for the good rises.
What is the income elasticity of demand for an inferior good?
YED is negative for an inferior good, because as incomes rise the demand for the good falls.
What is the cross elasticity of demand for substitute goods?
XED is positive because if the price of good A increases then the demand for good B will increase.
What is the cross elasticity of demand for complementary goods?
XED is negative because if the price of good A rises then the demand for good B will fall.
Describe the relationship between supply and price.
As quantity supplied increases, the price increases too.
Define profit.
The difference between total sales revenue and total costs of production.
Factors which affect the supply curve.
Costs of production: -wages, -raw materials, -energy costs, -cost of borrowing. Technical progress Government taxes or subsidies.
Describe movement of the supply curve if supply increases.
The supply curve will shift left.
Describe movement of the supply curve if supply decreases.
The supply curve will shift right.
Define price elasticity of supply, and its formula.
Measures the change in the supply of a good in response to an initial change in price. (always positive).
PES=% change in quantity supplied / %change in price.
Factors affecting price elasticity of supply.
Length of production process (shorter more elastic),
Ease of accumulating stock, (can increase supply quickly)
Number of firms in the market (larger the more elastic).
Define excess supply and the result on the price of the good.
Excess supply is when planned demand
Define excess demand and the result on the price of the good.
Excess demand is when planned demand>planned supply. This causes prices to rise.
Define joint supply.
When one good is produced, another good is also produced from the same raw material.
Define competing supply
When one raw materials is used to produce good A so cannot be used to produce good B.
In joint supply, if the demand for good A increases, what happens to the supply of good B?
The supply of good B will increase.
