4.1.3 Price Determination In Acompetitive Market Flashcards
What is demand?
The quantity of a good or service that consumers are able and willing to buy at a given price during a given period of time
Which way is expansion of demand?
Q1 to Q2
Which way is contraction of demand?
Q1 to Q3
What does demand increasing look like on a graph?
Demand shifting outwards from D1 to D3
What factors shift the demand curve?
Population
Income (disposable income & wealth)
Related good (substitutes & compliments)
Advertising
Tastes & fashion
Expectations (future price changes)
Seasons
What is price elasticity of demand?
The responsiveness of demand to a change in price
PED formula
What numerical value is PED if a good is elastic?
What does the graph look like?
PED > 1
What numerical value is PED if a good is inelastic?
What does the graph look like?
PED<1
What does unitary elastic mean?
Change in demand = change in price
What does elastic mean?
Responsive to a change
What numerical value is PED if a good is unitary elastic?
What does the graph look like?
PED = 1
What numerical value is PED if a good is PERFECTLY inelastic?
What does the graph look like?
PED = 0
What numerical value is PED if a good is PERFECTLY elastic?
What does the graph look like?
PED = infinity
If PED = -1.33 is the good elastic or Inelastic?
As the value is greater than 1
Regardless of whether it is positive or negative
Bread is relatively price inelastic
What factors influence e PED?
- Necccessity
- Substitutes
- Addictive or habitual consumption
- Proportion of income spent on the good
- Durability of the good
What curve do taxes shift?
The supply curve
Who would have a larger burden from tax if the product was inelastic?
Consumer
Who would have a larger burden from tax if the product was elastic?
Producer
diagram of a subsidy
Supply shifts outwards
Price reduces for both consumer and producer
What’s the formula for total revenue?
TR = P x Q
What is YED (income elasticity of demand)?
The responsiveness of demand to a change in income
What is the formula for YED?
Y is income
What are inferior goods?
Goods which fall in demand as income increases
(Eg. Consumers switch to branded goods when income rises)
What is the YED for inferior goods?
YED <0
What are normal goods?
Goods where demand increases as income increases
What is the YED for normal goods?
YED>0
What is a luxury good?
A good where an increase in income causes an even bigger increase in demand
What’s is the YED for for luxury goods?
YED>1
What is cross elasticity of demand?
The responsiveness of demand of one good to a change in price of another good
What is the formula for XED?
What is the relationship between complimentary goods and XED?
NEGATIVE XED
If one good becomes more expensive, the quantity demanded for both goods will fall
What does a graph for strong complements XED look like?
A small fall in the price of good X leads to a large quantity demanded of Y
What does a graph for weak complements XED look like?
A large fall in the price of good X leads to only a small increase in quantity demanded of Y
What is the relationship between substitute goods and XED?
POSITIVE XED
If the price of one good increases consumers might switch to another good
What does a graph for strong substitutes XED look like?
A small increase in the price of good X leads to a large increase in QD of Y
What does a graph for weak substitutes XED look like?
A large increase in the price of good X leads to a smaller increase in the QD of Y
What is the XED for unrelated goods?
0
What is supply?
The quantity of a good ore service that a producer is able and willing to supply at a given price during a given period of time
Why do supply curves slope upwards?
If price increases, it’s more profitable for firms to supply the good
High prices encourage new firms to enter the market because it seems more profitable so supply increases
Why do changes in price cause expansion and contraction of the supply curve?
Profit motive : firms are driven by the desire to make large profits
How do you show an increase in supply on a graph?
Outward shift from S1 to S2
What factors shift the supply curve?
PINT SWC
Productivity
Indirect taxes
Number of firms
Technology
Subsidies
Weather
Costs of production
What is PES?
The responsiveness of supply to a change in price
PES equation
What is the PES for elastic goods?
PES > 1
What is the PES for inelastic goods?
PES<1
Graph for elastic PES
Graph for in elastic PES
What does the graph fro perfectly inelastic PES look like?
PES = 0
What does the graph for a perfectly elastic PES look like?
What’s factors influence PES?
Time scale
Spare capacity
Level of stocks
Howsubstiture factors are
Barriers to enter the market
What is equilibrium?
When supply meets demand
What is disequilibrium?
When demand is grater than supply
What is excess supply?
When price is above the equilibrium price
What does derived demand mean?
When the demand for one good is linked to the demand for another good
What does composite demand mean?
The good demanded has more than one use
What is joint demand?
When goods are bought together
What is joint supply?
When increasing the supply of one good causes an increase or decreases in the supply of another good
Eg. lamb and wool
