3. Price determination in a competitive market - micro Flashcards
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 period of time
Supply
The quantity of goods and services that producers are willing and able to sell at given prices in a given period of time
Competitive markets
Markets in which the large number of buyers and sellers possess good market information and can easily enter or leave a market
Ruling market price
(Equilibrium price)
The price at which planned demand equals planned supply
Effective demand
The desire for a good or service backed by the ability to pay
Substitute goods
Alternative goods that could be used for the same purpose
Complementary goods
When two goods are complements, they experience joint demand
Normal good
A good which demand increases as income rises and demand decrease as income falls
Inferior good
A good for which demand decreases as income rises and demand increases when income falls
Elasticity
The proportionate responsiveness of a second variable to an initial change in the first variable
Price elasticity of demand (PED)
Measures the extent to which demand for a good changes in response to change in price of that good.
PED = infinity
Horizontal demand curve
Perfectly elastic demand
PED = zero
Vertical demand curve
Perfectly inelastic demand
PED>1
Sloping down demand curve
Price elastic
PED<1
Steep sloping down demand curve
Price inelastic
Factors determining price elasticity of demand
-substitutability
-percentage of income
-Necessities or luxuries
-the ‘width’ of the market definition
-time
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 factors of production can be varied
Income elasticity of demand
Measures extent to which the demand for a good changes in response to a change in income
Always negative for an inferior good and positive for a normal good
YED>1
Superior goods or luxuries
Income elastic
0 < YED > 1
Necessities
Income inelastic
Cross-elasticity of demand
Measures the extent to which the demand for a good changes in response to a change in price of another good.
XED possible natures of relationships between goods
- complementary goods (joint demand)
- substitutes (competing demand)
- an absence if discernible demand relationship
XED of complimentary goods
Negative cross elasticities of demand
XED of substitute goods
Positive cross elasticities of demand
XED of goods with no discernible demand (no relationship)
Zero cross elasticity of demand
Profit
The difference between total sales revenue and total cost of production
Total revenue
All the money received by a firm from selling its total output
Conditions of supply
Costs of production including
- wage costs
- raw material costs
- energy costs
- costs of borrowing
Technical progress
Taxes imposed on firms
Subsidies granted by government to firms
Price elasticity of supply
Measures the extent to which the supply of a good changes in response to s change in the price of that good
PES = infinity
Horizontal supply curve
Perfectly elastic supply
PES>1
Shallow sloping supply curve
Elastic supply
PES =1
Unit elastic supply
PES<1
Steep sloping supply curve
Inelastic supply
PES = 0
Vertical supply curve
Completely inelastic supply
Factors determining PES
Length of production period
Availability of spare capacity
Ease of accumulating stocks
Ease of switching between alternative methods of production
Number of firms in the market and the ease of entering the market
Time (LR/SR supply, market period supply)
Equilibrium
A state of rest or balance between opposing forces
Disequilibrium
A situation in which opposing forces are out of balance
Excess supply
When firms wish to sell more than consumers wish to buy, with the price above equilibrium price.
Excess demand
When consumers wish to buy more than firms wish to sell, with the price below equilibrium price
Joint supply
When one good is produced another good is also produced from the same raw materials, perhaps as a by-product
Composite demand
Demand for a good which has more than one use, which means that in increase in demand foe that one use of the good reduces the supply of good for an alternative use.
Related to concept of competing supply
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.
