4.1.3 Price Determination In A Competitive Market Flashcards
Demand
The quantity of a good or service that consumers are willing and able to buy at a given price during a given period of time
What causes expansions and contractions on the demand curve?
Changes in price
What factors shift the demand curve?
Population Income Related goods Advertisements Trends Expectations Seasons
What is the law of diminishing marginal utility?
As an extra unit of a good is consumed, the marginal utility, ie the benefit derived from consuming the good goes down. Therefore consumers are willing to pay less for the good
Rationing function
Rising prices due to a shortage means that less will be consumed e.g high price of diamonds
Signalling function
Prices signal what is available, conveying information to producers and consumers
Derived demand
Goods that are demanded because they are needed for the production of other goods e.g bricks for buildings
Composite demand
A good that is demanded for at least 2 distinct purposes e.g sugar cane for ethanol and food
Inferior goods
When Income increases, demand goes down the
YED<0
Price elasticity of demand
% change in quantity demanded/%change in price
When is PED >1
When the good is price elastic
When is PED=1?
When the good Is Unitary elastic
When is PED=0?
When the good is Perfectly inelastic
When is PED=infinity?
When the good is Perfectly elastic
What factors influence PED?
Necessity Substitutes Addictiveness Proportion of income spent on good Durability of good Peak and off peak demand
What curve do taxes shift?
The supply curve
How do subsidies affect supply curve?
Outward shift in supply
Income elasticity of demand
% change in quantity demanded/% change in income
Normal good
When I come increases demand increases
YED>0
Luxury goods
Increase in income causes large increase in demand
YED>1
Cross elasticity of demand
% change in quantity demanded of x/ %change in price of y
What is the XED of complementary goods?
Negative XED because If one good becomes more expensive the quantity demanded for both decreases
What is the XED of close compliments
A small fall in the price of good x leads to a large increase of quantity demanded of y
Small negative value
What is the XED for weak compliments
A large fall in the price of good x leads to only a small increase in QD of y
Large negative value
XED for substitutes
Positive XED
Supply
The quantity of a good or service that a producer is able and willing to supply at s given price and given time period
What shifts the supply curve?
Productivity Indirect taxes Number of firms Technology Subsidies Weather Costs of production
What causes movements along the supply curve?
Change in price
Veblen goods
Goods sold on the basis that they cost more than their competitors e.g supreme
Joint supply
When the production of one good leads to the production of another good e.g increase in beef=increase in leather
Price elastic of supply
% change in quantity supplied/%change in price
When is PES>1
When supply is elastic
When is PES<1
When supply is inelastic
When is PES=0
Perfectly inelastic, supply is fixed
When is PES=infinity
Perfectly elastic, any Q can be met without changing the price
Factors influencing PES
Time scale Spare capacity Level of stocks How substitutable factors are Barriers to entry to the market
Joint demand
When goods are bought together such as a digital camera and a memory card
When is PED<1
When the good is relatively inelastic
When is there excess supply?
When price is above equilibrium
When is the excess demand
When price is below equilibrium
