Price Determination In A Competitive Market Flashcards
What is demand?
Is the quantity of a good or service that consumers are able and willing to buy at a given price during a given period of time
What is expansion on demand curve?
Lower price= more quantity
What is Contraction on the demand curve
Higher price = lower quantity demanded
What are the factors that shift the demand curve?
-population:larger the population higher the demand, also changing the population structure also affect demand such as distributions of different age groups
-income:if consumers have more disposable income demand increases.
-related goods: are substitutes (can replace another good) or complements (go together) one price decrease demand for other increase
-advertising: increase consumer loyalty to the good and increase demand
-taste and fashion: demand curve shift if consumer taste changes
-expectation: future price changes demand likely to increase in the present
-season: demand changes according to season
What is the law of diminishing marginal utility?
-as and extra unit of the good is consumed the marginal utility I.e the benefit derived from consuming the good, falls therefore consumers are willing to pay less for the good (e.g more and more chocolate bars)
What is price elasticity of demand? And what is the formula?
The responsiveness of a a change in demand to a change in price
%change in quantity demanded
———————————————
%change in price
What is a price elastic good ? Draw the graph
•a good that is very responsive to change (leads to even bigger change in demand)
•numerical value >1
What is a price inelastic good? Draw the graph
• a good that is relatively unresponsive to change in price
• numerical value <1
What is a unitary elastic good ?
•has a change in demand that is equal to the change in price
•numeric value 1
What is a perfectly inelastic good? Draw the graph
•has a demand that does not change when price changes
• numerical value is 0
What is a perfectly elastic good ? Draw the graph
• has a demand which falls to 0 when the price changes
• numerical value is 0
What are factors that influence price elasticity of demand?
•Necessity: have inelastic demand
Whereas luxury items are elastic demand
•substitutes: several alternatives then demand is more price elastic. Short run demand is less elastic as not enough time to find substitutes
•addiction: not sensitive to change (inelastic) as consumers addicted and therefore keep demanding
•proportion of income spent on the good: small proportion of income when price increases then inelastic
•durability if good: long lasting good then more elastic as consumers wait to buy another
•peak and off peak demand: tickets for train during peak time 9-5 is more inelastic
What does tax shift? And how does it affect consumers and firms?
• shift the supply curve NOT the demand
•if a firm sells good with an inelastic demand they are likely to put most of the tax burden on consumer, increase in tax will decrease supply, increase price and cause contraction in QD this raises government revenue.
•if a firm sells good with elastic price demand then they are most likely to put the tax burden on themselves. This is not as effective for increasing government revenue unless they want to purposely reduce the demand
What is a subsidy?
• a payment from the government to firms to encourage the production of a good and to their lower average costs.
•it has the opposite affect of tax as it increases supply as supply cure shifts right (not left).
•this increase consumer (lower prices) and producer (increased revenue)
How to work out total revenue?
P x Q sold
Inelastic good-price increase- increase revenue
Elastic good-price increase- decrease revenue
What is income elasticity of demand and what is the formula?
The responsiveness of a change in demand to a change in income
%change in QD
———————-
%change in Y
What are inferior normal and luxury goods?
Inferior: those that see a fall in demand as income increases - <0
Normal: demand decreases and income increases >0
Luxury goods: increase in income causes and even bigger increase in demand >1
What is cross elasticity of demand? And what is the formula?
• the responsiveness of a change in demand of one good to a change in price of another
%change QD of X
————————-
%change P Of Y
What are complementary goods ?
• have a negative XED, if one good becomes more expensive the quantity demanded for both goods will fall
•close comments: decrease in price of one good causes a huge rise in demand of another (elastic)
•weak comments: increase in price of one good causes a small fall in the demand of the other (inelastic)
What are substitute goods?
•goods that can replace another good so XED is positive and demand curve is upwards sloping
•close substitutes: a small increase in the price of good X leads to large decrease in QD of good Y (elastic)
•Weak substitutes: a large decrease in teh price of good X leads to a small increase in QD of good Y (inelastic)
What are unrelated good?
• have a XED equal to 0
Why are firms interested in XED?
It allows them to see how much competitors they have therefore they are less likely to be affected by price changes by other firms if they are selling complementary goods or substitutes
What is supply?
The quantity of a good or service that a producer is able and willing to supply at a given price during a given period of time
Why do supply curves slope upwards?
•If price increases it is more profitable for the firm to supply the good
•high prices encourage new firms to enter the market because it seems profitable
• with larger outputs firms costs increase so they need to charge a higher price to cover the cost
