Price determination competitive markets Flashcards
Equilibrium price
EP- price at which planned demand for a good or service exactly planned supply
Supply
S- quantity of good and services a firm is willing and able to produce at a given price in a given time period
Demand
D- quantity of good and services that consumers are willing and able to buy at a given price over a given period of time.
-Law- as a goods price falls more is demanded, an inverse relatonship
->Downward slope due to income and substitution effect
Determinants of demand
Non-price factors PASIFIC
Population
Advertising
Substitutes price
Income
Fashion
Interest Rates
Complements price
Shift the curve
Normal goods
N- a good for which demand increases when incomes rise and decreases when incomes fall
Inferior good
In- a good for which demand decreases as incomes rise and increases when incomes fall
Price Elasticity of Demand
PED- measures the extent to which the demand for a good changes in response to a change in price
PED equation
PED= /\Qd% / /\P%
Income Elasticity of Demand
YED- measures the extent to which the demand for a good changes in response to a change in income
Cross-Elasticity of Demand
XED- measures the extent to which the demand for a good changes in response to a change in price of another good
XED equation
XED= /\Qa% / /\Pb%
Positive= substitutes, Negative= complements
Determinants of PED
SPLAT
Substitutes (No.)
Percentage of Income
Luxury/ necessity
Addictive/ habitual
Time period
Determinants of supply
Non price factors- PINTSWC
*Productivity (Labour + capital)
*Indirect Tax
No. Firms
*Technology
*Subsidy
Weather
*Costs of production
*=direct
Shifts curve
Costs of production
-Regulation (taxes)
-Cost of borrowing (interest)
-Wages
-Raw materials
-technical progress
Price Elasticity of Supply
PES- extent to which the supply of a good changes in response to a change in price
PES equation
PES= /\Qs% / /\P%
Determinants of PES
PSSST
-Production lag
-Stock
-Spare capacity
-Substitutability of FoPs
-Time- adapt long run production process
FoPs- factors of production
PES Values
<1- inelastic
>1-elastic
0- perfectly inelastic
00- perfectly elastic
1- unit elastic
Types of demand
JCLED
Joint- demand for one product generates demand for another
Composite- demand for one good reduces supply of another (relate to PPF)
Latent- consumer demand with no purchasing power from the consumer
Effective- demand backed up by consumer willingness and ability to pay
Derived- demand for one good or service which is a factor input for another
4 Function of Price Mechanism
Allocating- scarce resources efficiently
Rationing- encourage/ discourage consumption
Signalling- existence of shortages/ surplus
Incentivising- producers to chance output
Draw graph eliminating excess supply
Draw graph eliminating a shortage
Draw diagram showing rev gain for a firm lowering prices when PED is elastic
Draw diagram showing rev gain for a firm raising prices when PED is inelastic
