3. Price determination in a competitive market Flashcards
What is a market?
A voluntary meeting of buyers and sellers with exchange taking place
What is demand?
The quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time
What is supply?
The quantity of a good or service that producers are willing and able to sell at given prices in a given period of time
What are competitive markets?
Markets in which large number of buyers and sellers possess good market information and can easily enter or leave the market
What is a ruling market price (equilibrium price)?
The price at which planned demand equals planned supply
What is effective demand?
The desire for a good or service backed by an ability to pay
What is market demand?
The quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices
What is individual demand?
The quantity of a good or service that a particular consumer or individual is willing and able to buy at different market prices
What is condition of demand?
A determinant of demand, other than the good’s own price, that fixes the position of the demand curve
What are substitute goods?
Alternative goods that could be used for the same purpose
What are complementary goods?
When two goods are complements, they experience joint demand
What does ‘increase in demand” mean?
There is a rightward shift of the demand curve
What does ‘decrease in demand” mean?
There is a leftward shift of the demand curve
What is a normal good?
A good for which demand increases as income rises and demand decreases as income falls
What is an inferior good?
A good for which demand decreases as income rises and demand increases as income falls
What is elasticity?
The proportionate responsiveness of a second variable to an initial change in the first variable
What is price elasticity of demand?
Measures the extent to which the demand for a good changes in response to a change in the price of that good
What are the factors determining price elasticity of demand?
Substitutability, percentage of income, necessities or luxuries, the ‘width’ of the market definition and time
What is short run?
The time period in which at least one factor of production is fixed and cannot be varied
What is long run?
The time period in which no factors of production are fixed and in which all the factors of production can be varied
What is income elasticity of demand?
Measures the extent to which the demand for a good changes in response to a change in income; it is calculated by dividing the percentage change in quantity demanded by the percentage change in income
What is 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; it is calculated by dividing the percentage change in quantity demanded by the percentage change in the price of another good
What are the three important demand elasticities?
Price, income and cross-elasticity of demand
What is market supply?
The quantity of a good or service that all the firms in a market plan to sell at given prices in a given period of time
What is profit?
The difference between total sales revenue and total cost of production
What is total revenue?
All the money received by a firm from selling its total output
What is condition of supply?
A determinant of supply, other than the good’s own price, that fixes the position of the supply curve
What is increase in supply?
A rightward shift of the supply curve
What is decrease in supply?
A leftward shift of the supply curve
What are the main conditions of supply?
- Costs of production, including wage costs, raw material costs, energy costs, costs of borrowing
- Technical progress
- Taxes imposed on firms, such as VAT, excise duties and the business rate
- Subsidies granted by the government to firms
What does a market supply curve show?
How much of a good all firms in the market intend to supply at different prices
Where do supply curves slope and why?
Usually upwards because higher prices lead to higher profits, encouraging existing firms to produce more and attracting new firms into the market
What makes the supply curve shift to a new position?
If any of the conditions of supply change
What is price elasticity of supply?
Measures the extent to which the supply of a good changes in response to a change in the price of that good
What is a equilibrium?
A state of rest or balance between opposing forces
What is disequilibrium?
A situation in which opposing forces are out of balance
What is market equilibrium?
A market is in equilibrium when planned demand equals planned supply, where the demand curve crosses the supply curve
What is market disequilibrium?
Exists at any price other than the equilibrium price, when either planned demand < planned supply or planned demand > planned supply
What is excess supply?
When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price
What is excess demand?
When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price
In a competitive market, what do changes in the market price affect?
It eliminates excess demand or excess supply; this is how the price mechanism helps to allocate scarce resources
What is joint supply?
When one good is produced, another good is also produced from the same raw materials, perhaps as a by-product
What is composite demand?
Demand for a good which has more than one use, which means that an increase in demand for one use of the good reduces the supply of the good for an alternative use. It is related to the concept of competing supply
What is derived demand?
Demand for a good or factor of production, wanted not for its own sake, but as a consequence of the demand for something else
What upward-sloping straight-line (linear) supply curves display price elasticities?
- If the supply curve intersects the price axis, the curve is elastic at all points, though elasticity falls towards unity as you move from point to point up the curve
- If the supply curve intersects the quantity axis, the curve is inelastic at all Points, though elasticity rises towards unity as you move from point to
point up the curve - If the supply curve passes through the origin, elasticity equals unity (+1) at all points on the curve
