Price Determination In A Competetive Market Flashcards
Productivity is calculated by?
Output per worker per time period
How can productivity be increased?
Training workers or using more advanced capital machinery
Defintion of PED?
It measures the responsiveness of the quantity demanded to changes in the price of the good.
Formula of PED?
% change in quantity demanded / % change in price
Factors influencing PED:
NASBIT
Necessity
Addictiveness
Substitutes
Brand loyalty
Income - proportion of income spent on it
Time i.e peak & off peak
What does inelastic PED curve look like, what numbers is it between & defintion
A price inelastic good has a demand that is relatively unresponsive to a change in price.
0-1
Shifters/determinants of demand curve:
PASIFIC
Population
Advertising
Substitutes
Income
Fashion & Trends
Interest rates
Complementary goods
What does elastic PED curve look like, what numbers is it between & defintion
1 and above
A price elastic good is very responsive to a change in price.
What does unitary PED curve look like, what number is it & definition
1
A unitary elastic good has a change in demand which is equal to the change in price.
What does perfectly inelastic PED curve look like, what number is it & definition:
0
A perfectly inelastic good has a demand which does not change when price changes.
What does perfectly elastic PED curve look like, what number is it & definition:
A perfectly elastic good has a demand which falls to zero when price changes.
Infinity
Income elasticity of demand defintion
The responsiveness of a change in demand to a change in income - YED
YED = % change in QD / % change in income
Inferior goods in relation to YED
They see a fall in demand as income increases
They are below 0 & negative
Normal goods in relation to YED
Demand increases as income increases
YED is above 0 & positive
Cross elasticity of demand
The responsiveness of a change in demand of one good (x) to a change in the price of another good (y).
XED = % change in QD of X / % change in price of Y
Complementary goods in relation to XED
If one good become more expensive, the quantity demanded for both will fall
XED - negative
Substitutes in relation to XED
If the price of one good increases, consumers may swap to another good
XED - positive
Supply?
The quantity of a good or service that a producer is able & willing to supply at a given price during a given period of time
Shifts of the supply curve are caused by:
PINTSWC
P - productivity
I - indirect taxes
N - number of firms
T - technology
S - subsidies
W - weather
C - costs of production
PES is?
The responsiveness of a change in supply to a change in price
PES = % change in QS / % change in price
Elastic supply curve:
Firms can increase supply at little cost
PES is greater than 1
Inelastic supply curve:
An increase in supply will be expensive for firms & take a long time
PES is lower than 1
Perfectly inelastic supply:
Supply is fixed, so if there is a change in demand, it cannot be met easily
PES = 0
