Price Determination in a Competitive Market - 3 Flashcards
what causes a shift in the demand curve?
real disposable incomes, tastes, population, prices of substitutes and price of complementary goods
what is the formula for PED?
percentage change in QD/ percentage change in price
what is meant by PED
responsiveness of the quantity demanded of a good or service to a change in its price
when PED is 0 what is it
perfectly inelastic
when PED is infinite
perfectly elastic
what are some detriments to price elasticity?
availability of close substitutes, percentage of income spent on product, nature of product, ie necessity or luxury.
what is meant by YED
income elasticity of demand, responsiveness of demand to a change in income
how do you calculate YED
percentage change in quantity demanded/ percentage change in real income
How do you tell if something is a normal good?
YED is greater than 0
How do you tell if something is an inferior good?
YED less than 0
what is meant by a normal good
a rise in income will cause a rise in demand
what I meant by an inferior good
a rise in income will cause a fall in demand
what is the PED of a luxury good?
greater than 1
what is the PED of a necessity good?
less than one but greater than 0
what is XED
crosss elasticity of demand, responsiveness of the demand for a product compared to the price of another
How do you measure XED
percentage change in the quantity demanded of good A / percentage change in the price of good B
what does a positive value of XED show
that the products are close substitutes
what does a negative XED show
that the products are compliments
what causes shifts in the supply curve?
production costs, productivity, taxes on businesses, production subsidies, technology
What is meant by PES?
price elasticity of supply, responsiveness of the quantity supplied of a good to a change in price
how do you calculate PES
percentage change in quantity supplied/ percentage change in price
what is the PES when supply is price inelastic
between 0-1
what are some detriments of PES
time taken to expand supply, size of space capacity, available stock, ease of switching production.
if the price is above the free market equilibrium what is there?
excess supply
if the price Is below free market equilibrium what is there?
excess demand
what is joint demand?
complementary goods, good that are demanded together
what is joint supply?
production of one good is used in the production of another good
what is composite demand?
when a good is demanded for more than one use
what is derived demand?
when the demand for one good makes another good more demanded ie healthcare and doctors
