Price Determination Flashcards
What is a market
A voluntary meeting of buyers and sellers in which exchange takes place
Demand
Quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time
Supply
Quantity of a good or service that producers are willing and able to sell at given prices in a given period of time
Competitive markets
Markets in which the large number of buyers and sellers possess good market information and can easily enter or leave the market
Ruling market price
Also known as equilibrium price, the price at which planned demand equals planned supply
Effective demand
The desire of a good or service backed by an ability to pay for it
Market demand
Quantity of a good or service that all consumers in the market are willing and able to buy at different market prices
Individual demand
Quantity of a good or service that a particular consumer is willing and able to buy at different market prices
Condition of demand
A determinant of demand, other than the good’s own price, that fixes the position of the demand curve. A change in condition, such as different fashion tastes, cause a shift in the demand curve
Main conditions of demand
Prices of substitute goods, Prices of complementary goods, Personal income, Tastes and preferences, Population size
Substitute goods
Alternative goods that could be used for the same purpose
Complementary goods
When two goods are complements, they experience joint demands
Normal good
A good for which demand increases as income rises and demand decreases as income falls, like clothing
Inferior good
A good for which demand decreases as income rises and demand increases as income falls. An example could be inexpensive foods like ready meals or instant noodles
Price elasticity of demand
Measures the extent to which the demand for a good change in response to a change in the price of that good
Factors determining price elasticity of demand
Substitutability- existence of substitute products greatly affects elasticity if the similar product has raised in price
% of Income- the percent of income that the product takes from consumers, a raised price with an already cheap item may barely change how the consumer views it compared to a new car for example
Necessities or Luxuries
Time- takes time to respond in a change of price
Income elasticity of demand
Measures the extent to which the demand for a food changes in response to a change in income; it is calculated by dividing %change in quantity by %change in income
Cross-elasticity of demand
Measures the extent to which the demand for a good changes in response to a change in the price of another good; calculated by %change in quantity demanded by %change in price of another good
The main conditions of supply
Costs of production including: wage costs, raw materials costs, energy costs, costs of borrowing
Technical progress
Taxes imposed on firms
Subsidies granted by gov to firms
Price elasticity of supply
The extent to which the supply of a good changes in response to a change in the price of that good
Factors determining price elasticity of supply
Length of production period
Ease of accumulating stocks
Ease of switching production methods
Time- market period supply, short run supply, long run supply
Market equilibrium
Households plan to demand exactly the same quantity of a product that firms plan to supply so price does not change
Excess supply
The unsold stock due to a larger supply over demand. The usual price becomes the disequilibrium price causing an excess in supply. Therefore to get rid of unsold stock, firms reduce price to where demand meets the new supply or any price they are willing to accept which eliminates excess supply.
Excess demand
Unfulfilled demand where households buy the maximum quantity producers are prepared to sell as demand is higher than supply. As demand raises, equilibrium becomes disequilibrium as there is an excess in demand at the old equilibrium price. Market forces get rid of excess demand as price rises to where supply meets the new demand
Joint supply
When the production of one good leads to the supply of a by-product from the same raw materials
Joint demand
If demand for a product increases then the demand for a complementary good of that product will also rise, however the opposite is true for a substitute good, if demand for a product rises the demand for the substitute good will fall.
Composite demand
Demand for a good which has more than one use, meaning an increase in demand for one use of the good, reduces supply for the other use. For example raised demand for wheat as a biofuel causes less availability for wheat as a food
