Chapter 3 : Price determination in a competitive market Flashcards
What is price elasticity of demand ?
PED is the responsiveness of the quantity demanded of a good to a change in a price
What is the formula for PED ?
PED = percentage change in quantity demanded/percentage change in price
What does it mean when the price elasticity if demand is elastic ?
A change in price leads to a larger % change in the quantity demanded.
What does it mean when the price elasticity of demand is inelastic ?
A change in price leads to a smaller % change in quantity demanded.
What is unitary elastic demand ?
When the change in price leads to the same % change in quantity demanded and the value of PED is 1.
What is perfectly inelastic demand?
When the change in price leads to a zero % change in quantity demanded and the value of PED is 0.
What is perfectly elastic demand?
When the change in price leads to an infinite % change in quantity demanded and the value of PED is infinite.
Explain and tell me what does PANT stand for?
Percentage of income spent on product
Availability of close substitutes
Nature of product
Time period
Explain and tell me what does SIPPC stand for?
Substitute products
Income
Preferences/tastes
Population
Complementary goods
What is demand?
Demand is the quantity of a good or service that producers are willing able to sell at a given price.
What is supply?
Supply is the quantity of a good or service that producers are willing and able to sell at a given price.
What is effective demand?
Demand backed up by the ability to pay.
What is the law of demand?
As the price of a good or service falls the quantity demanded increases.
What is the law of supply?
As the price of a good or service increases the quantity supplied increases.
What is income elasticity of demand?
The responsiveness of demand to a change in income.
What is the formula for YED?
YED = % change in quantity demanded/ % change in income
What does it mean when the demand for a product is income elastic?
The value of YED is 1. An increase in income leads to a greater % increase in demand.
What does it mean when the demand for a product is income inelastic?
The value of YED is between 0 and 1+. An increase in income leads to a smaller % increase in demand.
What is cross elasticity of demand?
The responsiveness of the demand for a product following a change in the price for another product.
What is the formula for XED?
XED = % change in quantity demanded of product A / % change in price of product B
In XED what does it mean when the value is negative and when the value is positive? Explain this.
Positive value = substitutes
Negative value = complementary goods
What is price elasticity of supply?
The responsiveness of the quantity supplied of a good or service to a change in price.
What is the formula for PES?
PES = percentage change in quantity supplied/ percentage change in price
What is joint demand?
Goods that tend to be demanded together.
What is Joint supply?
The production of one good leads to the production of another good.
What is composite demand?
When one good is demanded for more than one use.
What is derived demand?
When a particular good or factor of production is necessary for the provision of another good.
