Chapter 3 - Price determination in a competitive market Flashcards
Formula for PED
% Change Demand / % Change Price
Formula for YED
% Change Demand / % Change Income
Formula for XED
% Change Demand A / % Change Price B
Formula for PES
% Change Supplied / % Change Price
What is 0 PED
Perfectly Inelastic - Price no impact on demand
What is 0-1 PED
Inelastic - Price has little impact on demand
What is 1+ PED
Elastic - Price has lots impact on demand
What is ∞ PED
Perfectly Elastic - There is only one price - horizontal demand curve
What is 0 YED
Income has no impact on demand
What is 0-1 YED
Normal Necessity e.g. Bread
What is 1+ YED
Normal Luxury e.g. Holidays
What is 0 XED
No relationship
What is 0-1 XED
Weak relationship
What is 1+ XED
Strong relationship
What is 0 PES (Same as PED)
Perfectly Inelastic e.,g. Vertical supply curve
What is 0-1 PES (Same as PED)
Inelastic - steep supply curve. Little scope increase production in response to increase in price.
What is 1+ PES (Same as PED)
Elastic -shallow supply curve. Scope increase production. Spare Capacity & Stock.
What has positive PED
Veblen Goods only
What if PED is negative
Most goods have inverse relationship between price and Demand
What has positive YED
Normal Good - more income buy more
What has negative YED
Inferior Good - more income buy less (less income buy more)
What has positive XED
Substitutes e.g. Coca-Cola & Pepsi
What has negative XED
Complements e.g. Strawberries & Cream
What does PED mean and what does it measure
Price elasticity of demand - Measures the sensitivity of the quantity demanded of a good to a change in its price
What does YED mean and what does it measure
Income elasticity of demand - Measures the sensitivity of the quantity demanded of good to a change in consumer income
What does XED mean and what does it measure
Cross price elasticity of demand - Measures the sensitivity of the quantity demanded of good X to a change in the price of good Y
What does PES mean and what does it measure
Price elasticity of supply - Measures the sensitivity of the quantity supplied of a good to a change in its price
What is the PES of most goods?
Positive
What elasticity of demand are inferior goods always?
Negative YED
How do you calculate the percentage change in quantity supplied of a good following a change in price
Multiply the percentage change in price
What is an essential feature of an inferior good
YED is negative
Indirect tax on the production of a good will have no effect on price if demand is what
Perfectly elastic
What is a market?
A market is a voluntary meeting of buyers and sellers. It does not have to be a physical place.
What are some factors of a competitive market
- Large number of buyers and sellers
- Good market information
- Low barriers to entry and exit
- Price takers
What is Demand
Demand is the quantity of a product consumers are willing and able to buy at different prices in a specified time period
What is effective demand
When a consumer’s’ desire to buy a product is backed up by an ability to pay for it
What factors can affect demand
- Consumer tastes and preferences
- Income available to the customer
- Prices of other goods and services ( Substitute and complementary goods)
- Interest rates
- Consumer population
What is the income effect
at lower prices, consumers can afford to purchase more with their income
What is the substitution effect
a fall in price makes one good relatively cheaper than a substitute
What causes an outward shift in demand
- Rise in real income
- Increase in price of substitute good
- Fall in price of complementary good
- Change in consumer preference
- Increase in population
- Fall in interest rates
- Rise in consumer confidence
- Social changes that affect total demand for that product
What is a substitute good and an example
Goods in competitive demand that can be replaced for another product e.g Buses and cars
What is a complementary good and an example
Goods with joint demand, a rise in the price of a complement to good X should cause a fall in demand for X e.g iPhones and AirPods
What changes demand for normal goods
Income (A rise in income= more demand, A fall in income= less demanded)
Examples of inferior goods
Washing powder and pot noodles
What is substitutability
Number of close substitutes for a good and the uniqueness of the product in the market
What factors can determine whether a good is elastic or inelastic
- Substitutability
- The % of a consumers income
- Is it a necessity or luxury
What is supply
Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period
What is the basic law of supply
the market price of a commodity rises, so producers expand their supply onto the market
What causes a shift in market supply
- Changes in production costs (Wages, price of raw materials, energy bills)
- Government taxes and subsidies
- Externtal shocks
- Production technologies
- New producers in market
- Change in objectives
- Change in substitute prices in production
What is equilibrium
Demand and supply are the same
What is equilibrium price also known as
Market-clearing price
Why might market demand shift to the right
- A rise in the price of a substitute or a fall in the price of a complement
- An increase in consumers’ income or wealth
- Changing consumer tastes and preferences in favour of the product
- A fall in interest rates
- A rise in consumer confidence
Why might market supply shift to the right
- A fall in the costs of production
- A government subsidy to producers that reduces their costs for each unit supplied
- A fall in the price of a substitute in production
- improvement in technology (higher productivity and efficiency)
- The entry of new suppliers (firms) into the market
What is derived demand and an example
when a product is demanded for use in the production of another product. E.g the housing market (construction of new homes rises, so too does the demand for materials used)
What is composite demand and an example
when you demand a good for more than one use. E.g crude oil is demanded for petrol and plastic
What is joint supple and an example
when a rise in the output of one product leads to a rise in the supply of the other product E.g more Sheep supplies more wool, meat and skin
What is latent demand and an example
willingness to purchase a good, but where the consumer lacks the real purchasing power to be able to afford the product E.g a yacht
