How Prices are Determined Flashcards
What is Demand?
The quantity of a good or service that consumers are willing and able to buy at given prices
over a given period of time.
What is the trend in the Demand Curve?
As the products Price decreases, Quantity demanded increases.
What causes a rightward shift in demand?
GOOD NEWS (using PASIFIC):
Increase price in substitute good.
Decrease price in complement good
Increasing population
Successful advertising
What are the factors that influence demand?
P opulation
A dvertising
S ubstitute good price
I ncome
F ashion/trends
I nterest rates
C omplement good price
What is supply?
The quantity of a good or service that firms or producers are willing and able to supply at a given price over a given period of time.
What is the trend in the Supply curve?
As price of product supplied increases, Quantity supplied increases.
What causes a rightward shift in a supply curve?
GOOD NEWS (using PINTS WC)
Good weather
Good developments in technology
Increase in subsides
A more productive workforce
What are the factors that influence supply?
P roductivity
I ndirect taxes
N umber of firms
T echnology
S ubsides
W eather
C ost of production
What is meant by the equilibrium price?
The point at which demand is equal to supply
What is Excess supply and Excess demand?
Excess supply = Any price above the equilibrium price (encourages producers to lower prices)
Excess demand = Any price below the equilibrium price (encourages producers to raise prices to ration the goods)
How to calculate total revenue?
Selling price X Quantity sold
TR = PxQ
What are substitute goods?
A good which can be replaced by another good.
What are complement goods?
A good which is demanded because it is used with another good.
What are the trends of substitute goods?
Substitute Good A price increases =
Substitute Good B demand increases
What are the trends of complement goods?
Complement Good A price increases =
Complement Good B demand decreases
What is Price elasticity of demand? (PED)
The responsiveness of quantity demanded
to a change in price.
What are the factors affecting PED?
Substitutability
Percentage of income
Necessity or Luxury
Addictive goods
Time
How to measure PED?
% Change in quantity demanded
% Change in price demanded
(Q before you P)
How to know if good is Inelastic or Elastic?
(PED)
If 0 to -1 : Inelastic
If less than -1 : Elastic
(PED is always 0 or a negative number)
What is a trend of Inelastic goods?
(PED)
When a large change of price results in a small change in quantity demanded
What is a trend of Elastic goods?
(PED)
When a small change in price results in a large change in quantity demanded
What is Price elasticity of Supply?
(PES)
The responsiveness of quantity supplied to a
change in price.
What are the factors affecting PES?
Storage / Stockpiles
Spare production capacity
Time (how long it takes to respond)
How to measure PES?
% Change is quantity supplied
% Change is price
(Q before you P)
How to know if good is Inelastic or Elastic?
(PES)
If less then 1 : Inelastic
If greater than 1 : Elastic
(PES is mostly positive)
What is a trend of Inelastic goods?
(PES)
When a large change in price results in a small change in quantity supplied
What is a trend of Elastic goods?
(PES)
When a small change in price results in a large change of quantity supplied
