price determination in a competitive market( from supply onwards not done0 Flashcards
what is a market?
A market is a voluntary meeting of buyers and seller. Both buyer and seller have to be willing partners to the exchange.
what is a competitive market?
A competitive market is a market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market.
when does effective demand occur?
Effective demand occurs when there is a willingness and ability to purchase a good or service at a given price
In order to demand something you must:
Want the good
Have enough money to buy the good
what is a market demand?
The quantity of a good or service that ALL consumers in a market are willing and able to buy at different market prices
what does a demand curve show?
the relationship between price and quantity demanded.
describe the law of demand
There is an inverse (when one goes up the other goes down) relationship between the price of a good and demand.
As prices fall, we see an increase in demand.
If price rises, there will be a decrease in demand.
This is assuming CETERIS PARIBUS
what is the level of demand determined by?
Price of the good – MOVEMENT ALONG
what is the acronym for causes of shifts in demand ?
PASIFIC
name the causes of shift in demand
Population changes
Advertising
Substitutes goods – Pepsi vs Coca Cola
Income
Fashion/tastes
Interest rates
Complements price – Printer and Printer Ink
describe the causes of shift in demand
P- Population. The larger the population, the higher the demand. Changing the structure of the population also affects demand, such as the distribution of different age groups.
A- Advertising. This will increase consumer loyalty to the good and increase demand.
S- Substitutes. A substitute can replace another good, such as two different brands of TV. If the price of the substitute falls, the quantity demanded of the original good will fall because consumers will switch to the cheaper option.
I - Income If people’s incomes rise, they are able to buy more goods and it is assumed that they will. This means demand will increase.
F- Fashions and trends. The demand curve will also shift if consumer tastes change. For example, the demand for physical books might fall, if if consumers start preferring to read e-books
I- Interest rates. If a customer has to borrow money in order to buy the product e.g. house, car or holiday, when interest rates go down consumers are more likely to demand more of these products.
C- Complements. A Complement goes with another good, such as strawberries and cream. If the price of strawberries increases, the demand for cream will fall because fewer people will be buying strawberries, and hence fewer people will be buying cream.
normal good
goods for which the demand rises as consumer income rises.
inferior good
a good whose demand decreases when consumer income rises
luxury good
increased income leads to a bigger percentage increase in demand
necessity good
give examples
Necessity goods refer to those goods for which there is no change in demand with a change in the income of consumer
Example: salt, wheat flour , medicines, etc.
These goods are essential for human existence and, therefore, they occupy a higher place in the consumers’ order of preference
the income effect
discussion points:
price
there is an income effect when the price of a good falls because the consumer can maintain the same consumption for less expenditure. Provided that the good is normal, some of the resulting increase in real income is used to buy more of this product.
the substitution effect
The substitution effect – when the price of a good falls because the product is now relatively cheaper than an alternative item and some consumers switch their spending from the alternative good or services
exceptions to the law of demand
speculative demand
Veblen goods
Good for which consumers use price as an indicator of quality:
exceptions to the law of demand
speculative demand
Veblen goods
Good for which consumers use price as an indicator of quality:
speculative demand
Speculative demand: if the price of a good e.g., housing, shares or a foreign currency starts to rise, people may speculate that in the near future the price will rise even further
Good for which consumers use price as an indicator of quality:
consumers may lack accurate information about the quality of some goods they want to buy e.g., second hand cars and computers
Veblen goods
some companies try to sell their goods based on the fact that they cost more than those of their competitors. Also known as ‘snob’ goods, some people may wish to consume more as a signal of their wealth (e.g., Ferrari)
