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
PES
price elasticity of supply is a measure of how quantity supplied of a good responds to a change in price
PES equation
percentage change in quantity supplied/percentage change in price
PES being elastic
a percentage change in price will cause a larger change in quantity supplied
PES being inelastic
a percentage change in price will cause a smaller change in quantity supplied
factors affecting PES
unemployment- increase elasticity
perishable goods- have inelastic supply cause they cant be stored for long
high stock level- firms with high stock levels have elastic supply
equilibrium point
where supply and demand meet
disequilibrium point
when supply and demand arent equal, when theres excess demand and supply
excess supply
when quantity supplied is greater than quantity demanded
excess demand
when demand for a good or service is greater than supply
Shifts in demand and supply changing the market equilibrium
a shift in demand will cause price to increase or decrease and supply to shift creating a new equilibrium
a shift in supply will cause a change in price causing demand to shift creating a new equilibrium
joint supply
where production of one good or service involves the production of another, if price increases then the supply of it or any joint products will increase
composite demand
when goods have more than one use
derived demand
when the demand for one good or factor of production is used in making another good
Law of diminishing marginal utility
as consumption increases utility decreases.
it causes the demand curve to slope downwards as increase in price decreases quantity demanded
