3 - Price Determination Definitions Flashcards
Effective Demand
Demand for a product which can be supported monetarily.
Market Demand
The total number of consumers who are willing and able to purchase a good or service at a given price.
Individual Demand
The demand for a good or service by a household or individuals.
Condition of Demand
At a higher price, demand for a product will contract, as well as other factors - weather, trends.
Substitute Goods
A product or service that consumers see as a good enough alternative to another product.
Complementary Goods
Products which are bought and used together.
Increase in Demand
Demand for a product increases, because of a change in another.
Decrease in Demand
Less of a product is purchased.
Normal Good
An increase in demand of certain goods because of higher living standards.
Inferior Good
A decrease in demand of certain goods because of an increase in living standards.
Market Supply
The quantity of a good or service that all firms in a market plan, to sell at given prices, in a given period of time.
Profit
The difference between total sales, revenue, and total costs of production.
Condition of Supply
A determinant of supply, other than price, which causes a shift in the supply curve.
Market Equilibrium
The state in which supply and demand balance out, and prices become stable as a result.
Market Disequilibrium
Quantity supplied isn’t equal to quantity demanded. As a result, price is above equilibrium.
Excess Supply
The quantity being offered exceeds quantity demanded, at the current price.
Excess Demand
Demand exceeds supply at a given price.
Joint Supply
Production of one good leads to the supply of another.
Composite Demand
Where goods have more than one use.
Derived Demand
The demand for a good or service that results from the demand for a different good or service.
Rationing Function
As prices rise, excess demand is removed, so only consumers who have the ability to pay can purchase a good.
Signalling Function
Prices provide important market signals to producers, to increase or decrease production.
Incentive Function
Increased prices strengthen incentives to firms, to produce more, in order to make a profit.
Allocative Function
Diverts resources to where they can maximise returns, and away from uses where they don’t.
Elasticity
The responsiveness of a second variable to an initial change in the first variable.
Price Elasticity of Demand
Measures the extent to which demand for a good changes in response to a change in price.
Income Elasticity of Demand
Measures the extent to which demand for a good changes in response to a change in income.
Income Elastic Demand
When a change in income leads to a change in demand by a similar amount.
Income Inelastic Demand
When a change in income doesn’t change quantity demanded by the same amount.
Negative Income Elasticity
When demand for a product decreases, as consumer income increases.
Luxury Goods
A good for which demand increases as income increases, so a higher proportion of income is spent on it.
Necessities
Things which are still purchased, when incomes are low, so proportion of income spent on these doesn’t increase, as income increase.
Inferior Goods
A good for which demand drops, as income rises.
Normal Goods
Goods for which demand increases, as incomes increase.
Cross Elasticity of Demand
The extent to which demand for a good changes in response to a change in price of another good.
Price Elasticity of Supply
The extent to which supply of a good changes in response to a change in price of that good.
