3. Price Determination In A Competitive Market Flashcards
Elasticity
The proportionate responsiveness of a second variable to an initial change in the first variable
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.
How does substitutability determine price elasticity of demand
When a substitute exists for a product, consumers respond to a price rise by switching expenditure away from the good and buying a substitute whose price has not risen. When very close substitutes are available, demand for the product is highly elastic. When there are little substitutes for a product——> demand is likely to be inelastic.
How does percentage of income determine price elasticity of demand
Demand curves for goods and services on which households spend a large proportion of their income tend to be more elastic than those of small items that account for only a small fraction of income- households will be more responsive to items which households spend a large portion of their income
How do necessities or luxuries determine price elasticity of demand
It is the existence of substitutes that really determines price elasticity of demand, not the issue of whether the good is a luxury or a necessity.
How does the ‘width’ of the market definition determine price elasticity of demand
The wider the definition of the market under consideration, the lower the price elasticity of demand.
How does time determine price elasticity of demand
For many goods and services, demand is more elastic in the long run than in the short run because it takes time to respond to a price change.
Short run
The time period in which at least one factor of production is fixed and cannot be varied.
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 an inferior good?
an inferior good is a good whose demand decreases when consumer income rises,
If total consumer expenditure increases in response to a price fall, demand is:
Elastic
If total consumer expenditure decreases in response to a price fall, demand is:
Inelastic
If total consumer expenditure remains constant in response to a price fall, demand is:
Neither elastic nor inelastic
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 direction does a demand curve shift for an inferior good when disposable income rises
Left
What direction does a demand curve shift for a normal good when disposable income rises
Right
Income elasticity is always _______ for an inferior good and ______ for a normal good
Negative / positive
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
Possibilities of demand relationships between goods
. Complimentary goods (or joint demand )
. Substitutes (or competing demand)
. An absence of any discernible demand relationship
What goods have negative cross-elasticities of demand
Complementary goods (as the price increases for one, demand decreases for the other)
For most demand relationships between two goods, are most cross-elasticities of demand elastic or inelastic ?
Inelastic (for both substitutes and complements)
What goods have negative cross-elasticities of demand
Complimentary goods
Market
A voluntary meeting of buyers and sellers with exchange taking place
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
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.