Price determination Flashcards
What is a demand curve
a curve showing how much of a good customers are willing to buy at each and every price level
What relationship does a demand curve show
the relationship between price and quantity demanded
What does a shift in the demand curve mean
Change in price
What is the relationship between price and quality demanded
- As price falls, quality demanded rises
- As price rises, quantity demanded falls
(negative correlation)
What are the determinants of demand
-Price
-Consumer income
-Prices of other goods/services
-Consumer tastes and fashion
-other factors eg advertising
What does ceteris paribus mean
All other factors are the same- so often assume ‘ceteris paribus’ as many factors are uncontrollable
What is a normal good
- A good that when price increases demand decreases and vice versa
What is a Veblen good
- A luxury item that when price increases so does demand- ‘snob effect’- people will pay more to show status
What is a Giffen good
- A basic good that when price increases, so does demand as it means alternatives are unaffordable
Example of Giffen good
- Bread- a rise in price in bread means poor families cannot afford other products such as meat anymore, and so spend MORE of their income on bread
What is an inferior good
- One where demand decreases as income increase ( eg Giffen goods)
What happens to demand of a good if price of a substitute rises
- Demand will increase- cheaper alternative
What happens to demand of a good is price of a complimentary good increases
- Demand will decrease- lesser reason to buy the good
How is an increase in demand shown on a demand curve
Shift to right
How is decrease in demand shown on demand curve
- Shift to left
What is market equilibrium
When supply meets demand
What is supply
- The quantity of goods that sellers are prepared to sell and any given price over a period of time
What are complements
Products that are bought alongside another product
Cross elasticity of demand for complements
Negative- as price of good Y increases demand for good X decreases
What does the demand for substitute goods depend on
- Number and closeness of available substitutes
Cross elasticity of demand for substitutes
- Positive- as price of good Y increases demand for good X will increase
Close substitutes have a ……. XED. why?
Higher- because demand for good X is more sensitive to a change in price of good Y
What is composite demand
means that an increase in demand for one good or service will restrict its availability for another use
Examples of composite demand
- land- can be used for growing wheat or barley, but if barley being grown increases, wheat will have to decrease