Price Determination in a Competitive Market Flashcards
Describe Price elasticity of demand
- PED = %Δ Quantity Demanded / %Δ Price
- PED measures how responsive the quantity demand is relative to changes in the price of the good.
Describe income elasticity of demand
- YED = %Δ Quantity Demanded / %Δ Income
- YED measures how responsive quantity demanded of a good/service is relative to a change in income.
Describe cross elasticity of demand
- XED measures the responsiveness of a change in the quantity demanded of one good (X), relative to a change in demand for another good (Y)
- XED = %Δ Quantity demanded (X) / %Δ Price (Y)
Define inferior goods
- The demand for inferior goods experiences a fall when income rises.
- Inferior goods have a YED < 0
- EG) As income rises consumers switch to better quality branded goods, second hand car market.
Define luxury goods
- The demand for luxury goods experiences a relatively large increase in demand as income rises.
- Luxury goods have a YED > 1
- EG) Holidays, holiday homes, luxury clothing, luxury cards etc.
Define normal goods
- The demand for normal goods experiences a rise in demand as income rises.
- Normal goods have a YED > 0
A good/service with a PED > 1
-Goods/services with a PED > 1 are considered to be price elastic, due to the fact a change in price has a large effect on the quantity demanded.
A good/service with a PED < 1
-Goods/services with a PED < 1 are considered to be price inelastic, meaning changes to the price of a good will have minimal effect on the quantity demanded (competitive markets).
A good/service with a PED < 1
-Goods/services with a PED < 1 are considered to be price inelastic, meaning changes to the price of a good will have minimal effect on the quantity demanded (competitive markets).
A good/service with a PED = 0
- A good/service with a PED = 0 is considered to be perfectly price inelastic, therefore changes to price has zero effect on quantity demanded.
- Vertical demand curve.
A good/service with a PED = ∞
- A good/service with a PED equal to infinity is said to be perfectly price elastic, meaning price cannot change from a particular point and demand ceases to exist if price alters.
- Horizontal demand curve.
A good/service with a XED < 0 (negative)
- Compliments
- Goods/services with a negative cross elasticity of demand are said to be complementary. As the price of one good increases the quantity demanded for both goods will decrease.
A good/service with a XED > 0 (positive)
- Substitutes
- A good/service with a positive XED is referred to as a substitute, due to the fact an increase in the demand for one good will lead to a fall in the demand for another substitute good and vise versa.
Define demand
-Demand refers to the quantity of a particular good or service that consumers are willing to buy at a particular price.
Describe why the demand curve is downward sloping
- Law of diminishing returns states
- Consumers incentivised to pay the lowest price possible for a good/service, less consumers willing to pay higher prices.
- Inverse relationship between quantity demanded and price exists.
Factors that cause a shift in the supply curve
- Changes in productivity/development of technology
- Taxation
- Subsidies
- Changes to costs of production
- Resource/raw material prices
- Number of firms in the market
Describe why the supply curve is upward sloping
- At higher prices firms are incentives to produce more as it is profitable todo so.
- A firms costs may increase as output increases therefore pushing prices higher.
Describe price elasticity of supply
- PES = %Δ Quantity supplied / %Δ Price
- PES measures how responsive the quantity supplied of a good/service relative to changes in price.
A good/service with a PES > 1
- Goods/services with a PES of > 1 are considered to have an elastic supply. Changes to the price of a good/service leads to a relatively large change in quantity supplied.
- Firms can easily increase/decrease supply with changes in prices.
A good/service with a PES > 1
- Goods/services with a PES of > 1 are considered to have an elastic supply. Changes to the price of a good/service leads to a relatively large change in quantity supplied.
- Firms can easily increase/decrease supply with changes in prices.
A good/service with a PES < 1
- Goods/services with a PES < 1 are considered to be price inelastic, meaning a change to the price of a good/service has minimal effect on the quantity supplied by a firm
- More difficulty for firms to alter supply with inelastic supply.
Describe derived demand
- Derived demand refers to demand for a particular good/service which is derived/related to the demand for another related good or service.
- EG) The demand for labour is derived from the demand for the market in which labour is demanded.
- EG) The demand for glass is derived from the demand for construction of buildings.
Describe composite demand
- Composite demand for a good refers to goods which have more than one use. An increase in demand for a specific good may lead to a reduction in supply of another.
- EG)Increases in the demand for oil in the manufacturing industry may lead to a fall in demand for plastics that require oil.
Describe joint supply
- Joint supply occurs when changes to the supply of one good/service leads to an alteration in the supply of another related good/service.
- EG) Increasing the supply of cow meat –> increase in the supply of leather.
