Price Determination in a Competitive Market Flashcards
Causes of shifts in the demand curve
PIRATES
Population
Income
Related goods
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Tastes and fashions
Expectations
Seasons
Formula for Price Elasticity of Demand
PED = %Δ in Quantity Demanded / %Δ in Price
Formula for Income Elasticity of Demand
YED = %Δ in Quantity Demanded / %Δ in Income
Formula for Cross Elasticity of Demand
XED = %Δ in Quantity Demand of good X / %Δ in Price of good Y
Inferior Goods
Those which see a fall in demand as income increases. YED < 0
Normal Goods
Demand increases as income increases. YED >0
Luxury Goods
An increase in income causes an even bigger increase in demand.
YED > 1
Complementary Goods
If one good becomes more expensive,
the quantity demanded for both goods will fall. XED < 0
Substitute Goods
Can replace another good, so the XED is positive and the demand curve is
upward sloping.
The Relationship between Price Elasticity of Demand and Total Revenue
If a good has an inelastic demand, the firm can raise its price, and quantity sold will
not fall significantly. This will increase total revenue. If a good has an elastic demand and the firm raises its price, quantity sold will fall. This will reduce total revenue.
Factors that influence elasticities of demand
- Availability of Substitutes
- Necessity v Luxury
- Time
- Consumer Preferences
Causes of shifts in the Supply Curve
- Cost of Production
- Productivity
- Indirect Taxes
- Number of Firms
- Technology
- Subsidies
- Weather
Formula for Price Elasticity of Supply
PES = %Δ in Quantity Supplies / %Δ in Price
Factors influencing PES
- Time Scale
- Spare Capacity
- Level of Stock
- How Sustainable Factors are
- Barrier to Entry to the market
Equilibrium
Supply = Demand
Disequilibrium
Supply ≠ Demand
Joint Demand
This is when goods are bought together, e.g. digital cameras and memory cards
Competitive Demand
When there is other available alternatives to fufil the same consumer wants/ needs
Composite Demand
When the good demanded has more that one use
Derived Demand
This is when the demand for one good is linked to the demand for
a related good e.g. the demand for bricks and the demand for housing
Joint supply
This is when increasing the supply of one good causes an increase or
decrease in the supply of another good, e.g. producing more lamb will
increase the supply of wool
