Price determination in a competitive market Flashcards
Definition of demand
The quantity of goods/services that consumers are willing and able to consume at a given price and a given time.
Determinants of Demand (PASIFIC)
P - Population - Can affect the quantity demanded to provide for the population.
A - Advertising - Good advertising can increase Qd visa versa.
S - Substitute price - If substitutes are cheaper Qd decreases.
I - Income - If income increases people are able to consume more.
F - Fashion - If a good is fashionable, Qd will increase.
I - Interest Rates - If interest rates are low people more likely to spend
C - Complement’s Price - If complementary goods are cheap people are more likely to buy
Normal goods
A good that consumers demand more of when their incomes increase, YED = 0
Inferior Goods
A good that consumers demand less of when their incomes increase. YED = -0
Superior Goods
A good for which demand increases at a greater rate than real income when income rises, YED = 1
PED Calculation
PED = %change in Qd / %change in P
PES Calculation
PES = %change Qs / %change in P
XED Calculation
XED = % change Qd (Good X) / % change in P (Good Y)
YED Calculation
YED = %change in Qd / %change in Real Income
Interpretation of PED / PES (5)
PED = 0 - 1 = Inelastic
PED = 1- ∞ =Elastic
PED = 1 = Unitary
PED = 0 = Perfectly Inelastic
PED = ∞ = Perfectly Elastic
Causes of interrelated markets (5)
Competitive Demand
Joint Demand
Derived Demand
Composite Demand
Joint Supply
Competitive Demand
Demand for goods which fulfil similar needs and wants, so these goods can be substituted and provide similar/ the same utility. Eg. Pepsi and CocaCola.
Joint Demand
Demand for goods which tend to be consumed together, demand for complementary goods. Eg. Printers and Ink.
Derived Demand
Demand for a good which is used to meet another demand, so when demand for one good or service increases, derived demand will increase the demand for the goods needed to produce it. Eg. Labour demand is derived from demand for goods and services.
Composite Demand
Demand for a good which has multiple different uses. Eg. Milk (raw material) is demanded for Milk, Cheese, Yogurt.
Joint Supply
Supply of multiple goods tends to be produced through a single operation or process such that the goods are produced together. Eg. Cows - Meats, Leather, Milk.
Interpretation of XED (3)
Positive XED = Substitute Goods
Negative XED = Complementary Goods
c. 0 XED = No relationship
Interpretation of YED (3)
Negative YED = Inferior good.
YED > 1 = Luxury/ Superior Good.
YED 1- 0 = Normal Good
Determinants of PED (4)
Presence of substitutes ?
Type of good - eg. addictive / essential ?
Percentage of Income
Time - LR = more elastic
Total Revenue + PED
Total Revenue is maximised when PED = 1
If PED is elastic, a reduction in price will increase TR
If PED is inelastic, a reduction in price will decrease TR
Determinants of PES (5)
Production Lag
Substitutable Factors
Spare capacity
Stock Level
Time Scale
Market Mechanisms (4)
Signalling - Signals whether price is too high or low
Allocation - How are scarce resources allocated
Rationing - Excess demand is rationed
Incentive - to change price
