Price determination in a competitive market Flashcards
STUDY
What is demand?
The quantity of a good or service that consumers are willing and able to buy at a given price and time
What is supply?
The quantity of a good or service that producers are willing to sell at a given price and time
What are the factors affecting demand?
PASIFIC: Population, advertising, substitutes, income, fashion/trends, interest rates, complementary products
What are the factors affecting supply?
PINTSWC: Productivity, indirect taxes, number of suppliers, technology, subsidies, weather/climate, costs of production
What is the law of diminishing marginal utility?
As an extra unit of a good is consumed, the marginal utility falls (benefit from consumption), therefore demand falls
What is price elasticity of demand (PED)?
The responsiveness of quantity demanded to a change in price
What factors affect PED?
Whether the good is a necessity or a luxury, the number of substitutes, addictiveness, the proportion of income spent on good, and durability
What is income elasticity of demand (YED)?
The responsiveness of quantity demanded to a change in income
What is an inferior good?
Good for which demand falls as income rises
What is a normal good?
Good for which demand rises as income rises
What is a luxury good?
Good for which a rise in income leads to a greater proportional rise in demand
What is cross elasticity of demand (XED)?
The responsiveness of quantity demanded of one good to a change in price of another
What is a complementary product?
A product in joint demand, which has a negative XED
What is a substitute?
A product in competiting demand, which has a positive XED
What is price elasticity of supply (PES)?
The responsiveness of quantity supplied to a change in price
What factors affect PES?
Time scale, spare capacity, level of stocks, substitutability of factors, barriers of entry
What is market equilibrium?
The point at which demand meets supply - there is no excess demand or supply. Market equilibrium price is the price at this point
What is derived demand?
Demand for one good is related to demand for another good
What is composite demand?
When a demanded good has multiple uses
What is joint supply and competing supply?
When supply of one good is affected by supply of another good. This is joint if an increase in supply of one good increases supply of the other good, and competing if an increase in supply of one good decreases supply of the other good
