4.1.3 price determination in a competitive market Flashcards
demand
quantity of a good or service that consumers are able and willing to
buy at a given price during a given period of time
movement up demand curve
cotraction
movement down demand curve
expansion
factors shifting out demand
increased population
increased disposable income
related goods (substitutes)
advertising
tastes or fashion
expectations of future price
seasons
reason demand curve is downward sloping
dimishing marginal utility
price elastcitiy of demand definition
responsiveness of a change in demand to a
change in price.
ped formula
%QDchange/%Pchange
the flatter the cuurve…
the more elastic PED>1
factors influencing PED
necessity
substitues
addictiveness
proportion of income
durability (makes more elastic)
peak/vs off peak demand
the effect of elasticity on tax revenue
more elastic is greater burden for producer
inelastcitiy impact on revenue
increase
income elasticity of demand definition
the responsiveness of a change in demand to a
change in income.
incomer elasticity of demand formula
%QDchange/%Incomechange
elasticity of inferior goods
negative
elasticity of normal goods
positive
elasticity of luxury goods
greater than 1
cross elasticity demand definition
the responsiveness of a change in demand of one good,
X, to a change in price of another good, Y
formula for cross elasticity of demand
% change in q demanded of good x/ % change in price of good y
complementary goods XED
negative
subsitutes XED
positive
unrelated goods XED
0
supply
quantity of a good or service that a producer is able and willing to
supply at a given price during a given period of time.
why is the supply curve upwards sloping
If price increases, it is more profitable for firms to supply the good, so supply
increases.
High prices encourage new firms to enter the market, because it seems
profitable, so supply increases.
With larger outputs, firm’s costs increase, so they need to charge a higher
price to cover the costs.
factors that shift out the supply curve
productivity
indirect taxes (shift inwards)
number of firms
technology
subsidies
weather
costs of production
price elasticity of supply
the responsiveness of a change in supply to a change
in price.
PES formula
% change in supply / % change in price
factors influencing PES
time
spare capacity
level of stocks
how substituable FoP are
barriers to entry
market equilibrium
when demand equals supply
market clearing price
functions of price mechanism
increased demand
shortages
incentivises producers to increase prices
new price rations scarce resources
derived demand
demand for one good is linked to the demand for
a related good.
eg bricks and houses
Composite demand
This is when the good demanded has more than one use
eg Assuming there is a fixed supply of milk, an increase in the
demand for cheese will mean that more cheese is supplied, and therefore less butter
can be supplied.
joint demand
This is when goods are bought together, such as a digital camera and
a memory card.
joint supply
This is when increasing the supply of one good causes an increase or
decrease in the supply of another good. For example, producing more lamb will
increase the supply of wool.
