Price determination in a competitive market Flashcards
Demand
the quantity of a good/service that consumer are willing and able to buy at a given price, at a particular time
demand curve
shows the relationship between price and quantity demanded
a decrease in price from pe to p1 causes a extension in demand rises from qe to q1
an increase in price from pe to p2 causes a contraction in demand from qe to q2
income effect
if price falls to the amount a consumer can buy with income increase so demand increases
substitution effect
a fall in price of a good makes it cheaper than other goods so consumers will increase demand for a cheaper good and reduce demand for the expensive good
factors which cause a shift in demand-normal goods
people will demand more if real income increases shifting to the right
factors which cause a shift in demand-inferior goods
if real income increase demand will decrease shifting to the right
factors which cause a shift in demand-more equal distribution
demand for luxury goods decrease demand for other goods increase
PED
Price elasticity of demand is measure of how quantity demanded responds to a change in price
PED equation
Percentage change in quantity demanded / percentage change in price
PED being elastic
a percentage change in price will cause a larger change in quantity demanded
PED being inelastic
a percentage change in price will cause a smaller change in quantity demanded
YED
income elasticity of demand measures how much the demand for a good changes with real income
YED equation
percentage change in quantity demanded of a good/ percentage change in real income
XED
Cross elasticity of demand is a measure of how quantity demanded of one good responds to the change in price of another good
XED equation
percentage change in quantity demanded of good A/ percentage change in price of Good B
factors influencing PED-subsitutes
the more substitutes a good has the more price elastic it is
Factors influencing PED-type of good
demand for goods which are essential items, non essential items, for habit forming and for several different uses are inelastic
Factors influencing PED-income spent on good
demand for products that need a large proportion of the consumer income is more price elastic than goods which need a large proportion of income
relationship between revenue and PED
if theres elastic demand then a reduction in price will increase revenue and a increase in price will reduce revenue
if theres inelastic demand then a reduction in price will reduce revenue and a increase in price will increase revenue
relationship between income elasticity between normal and inferior goods
normal goods-as income rise, demand increases, the size of demand increase is dependent on the products elasticity
inferior goods- as income rises demand falls, a rise in income will lead to inferior goods being replaced
relationship between cross elasticity of demand- complementary and subsitute goods
substitutes have positive XED- a decrease in price of on substitute will reduce the demand for the other
complementary goods have negative XED- an increase in the price of a good will reduce in demand for its complements
supply
is the quantity of good or service that producers supply at a given price
supply curve
the relationship between price and quantity supplied
an increase in price from Pe to P1 causes an extension in supply increasing from Qe to Q1
a decrease in price from Pe to P2 causes a contraction in supply from Qe to Q2
Factors causing a shift in the supply curve
changes in costs of production-increase in costs decrease supply
improvements in technology-this can increase supply
changes to factors of production- increase in productivity of one factor increases output
