Micro: Price Determination In a Competitive Market Flashcards
What 2 axis are on a demand curve?
Price and quantity
What is Demand?
The quantity that a consumer is willing and able to buy at a given price
Factors that affect demand:
- Consumer …………..and ……………
- Income
3 …………….. Rates
- Population
5 ……………… goods
- ………………. goods
- Taste and preferences
- Interest
- Substitute
- Complimentary
How do you work out Price elasticity in demand?
% Change in the quantity demanded/ % change in price
Elastic demand is where the PED ?
Inelastic demand is where the PED ?
Unitary elasticity is where the PED ?
> 1
<1
=1
What is the equation for income elasticity of demand?
% Change in quantity demanded/ % Change in income
Cross-price elasticity of demand = % change in quantity demanded of …………… ÷ % change in the ………. of ……………….
Good A
Price
Good B
For cross-price elasticity of demand (XED), for a complementary good, what happens when there is a fall in price?
The quantity demanded increases. The relationship is negative.
For cross-price elasticity of demand (XED), for a substitute good, what happens when there is a fall in price?
For, substitutes, a fall in the price of one will lead to a fall in the quantity demanded of the other. Substitutes have positive cross elasticities of demand.
Perfectly elastic demand - PED =?
+/- Infinity
Any price increase will cause demand to drop to zero
Perfectly inelastic demand - PED =
0
Any price change won’t affect demand.
What is market equilibrium?
The equilibrium is the point where the demand curve meets the supply curve.
When there is excess supply in the market, what happens?
Producers cut the price as there is excess amount of resources.
When there is excess demand in the market, what happens?
They raise the price as the resources are scarce
A shift in the demand curve (but not in the supply curve) will have the following effects (Market Equilibrium):
An increase in demand (Outwards Shift) will cause …………….. in price. Supply will extend and form a new equilibrium (Q1,P1).
A decrease in demand (Inwards Shift)will cause the price ………… Supply will contract and form a new equilibrium (Q2, P2).
An Increase
To Fall
A shift in the supply curve (but not in the demand curve) will have the following effects:
An increase in supply (Outwards Shift) will cause………………. in price. Demand will extend and form a new equilibrium (Q1,P1).
A decrease in supply (Inward Shift) will cause ………………….. in price. Demand will contract and form a new equilibrium (Q2,P2).
A decrease
An Increase
If demand for a product is inelastic, a producer can increase ………….without the ……………sold falling very much.
Price
Quantity
If the good is elastic, you must …………… the price to increase quantity sold
Decrease
By doing this, you increase total revenue
What 3 factors affect elasticity?
- Percentage of income and time
- Availability of substitute of good/service
- Type of good
Are habitual/addictive goods elastic or inelastic?
Addictive goods tend to be more price inelastic because a change in price is unlikely to affect quantity significantly (if users feel they have a need for the product).
E.g. cigarettes
What is the equation for total revenue?
Price per unit × Quantity sold
What is the equation of price elasticity of supply?
% Change in quantity supplied ÷ % Change in price
