competitive markets Flashcards
What is a free market?
an economic market where prices are determined by supply and demand expressed by seller and buyers.
what is the relationship between demand and price
the law of demand - when the price of a good rises the quantity of demand will fall because
1. the income effect - people feel poorer
2. substitution effect - people will buy cheaper products similar to this
factors that influence demand?
taste - influenced by advertising, fashion
number and price of substitute goods - switching to and from competitor goods
income - increase in peoples incomes increases demands
expectation of price changes - if people believe prices will rise in future they will bulk buy
relationship between supply and demand
general relationship - as prices rise, demands fall
supply curve - generally upward sloping ( as prices rises suppliers are willing to produce more
demand curve - slope downwards (prices are higher, consumers buy less)
cost production
is all the expenses incurred in the process of creating and delivering a product
- changes in input prices
-technological advances
- organisational changes
- government policy
equilibrium price
where supply and demand are equal to one another = stable prices
over supply of goods =
prices to fall = higher demand
under supply of goods =
prices go up = less demand
price elasticity
how reactive market is to a change in price for a product
measuring price elasticity
demand = change in quantity demanded divided by change in price
supply = change in supply demanded divided by change in price
price elasticity of demand
reflection of consumer behavior to price change
price elasticity of supply
measures producer behavior
how to measure price elasticity of demand
dividing the percentage change in quantity demanded by the percentage change in price
if a company has a score between 0 and 1 it is
inelastic - only has small impact
