Price Determination Flashcards
What is Effective demand?
Demand from consumers that is backed up with the ability to pay.
What is demand?
Demand for a product is the quantity that purchasers are willing and able to buy at a given price in a given time period.
What causes a shift in the demand curve?
Changing prices of substitutes in competitive demand
Changing price of complements in joint demand
Changes in real disposable income of consumers
Inequality
Interest rates
Seasonal factors
What is derived demand, give an example?
Derived demand occurs when there is a demand for a good e.g. Steel resulting from demand for an intermediate good or service e.g. new houses
What is joint demand?
Joint demand is when demand for one product is positively related to market demand for a realted good or service.
What is an example of joint demand?
Fish and chips.
What is the cross elasticity of demand for two complements that are in joint demand?
Negative
What is composite demand?
Composite demand is where goods have more than one use, an increase in the demand to one product leads to a fall in the supply of the other.
What is an example of composite demand?
Milk, which can be used for cheese, yoghurts, cream, butter and other products.
What is supply?
Supply is defined as the quantity of a good or service that producers are willing and able to supply at a given price level in a given time period.
What causes shifts in the supply curve?
Changes in the unit costs of production
A depreciation in the exchange rate (Imports more expensive)
Advances in technology
Entry of new producers
Favorable weather conditions
Taxes, subsidies and government regulations
What is joint supply?
Joint supply is where an increase in the supply of one good leads to increases in the supply of a by-product.
What is an example of joint supply?
An expansion in the beef production will lead to a rising market supply of beef hides.
What is Market equilibrium price?
The price at which demand is equal to demand, it is the clearing point of the market.
What does Equilibrium mean in a market?
Equilibrium is when there is no tendency for market price to change.
What is excess demand?
Excess demand is when quantity demanded exceeds available supply.
What could excess demand result in?
It may result in queuing and an upward pressure on price, higher prices then ration demand to those consumers with effective demand. These higher prices in theory could stimulate an expansion of supply as producers respond to the chance of higher profits.