Price determination in a competitive market Flashcards
What is a market
a market is a voluntary meeting of buyers and sellers in which exchange takes place
What is a competitive market
it is when there are a large number of buyers and sellers who accept the market price not by their own decision but by everyone who takes part in the market
What do high competition do to barriers of entry and exit
they lack entry and exit which means buyers and sellers can easily enter the market
Do competitive markers have a high degree of transparency? Explain the term.
Yes competitive market have a high degree of transparency- buyers and sellers can quickly find out what everyone else in the market is doing
What is demand
the quantity of good and services that consumers are willing and able to buy at a given price in a given period of time
What is supply
the quantity of a good or service that producers are willing and able to sell at a given period of time
What does a demand curve show
shows the relationship between the price of a good or service and the quantity of the good or service demanded at difference prices.
What is market demand
the quantity of good or service that all consumers in the market wish to, and are able to, buy at different prices
What is individual demand
the quantity that a particular individual would like to buy
When does a movement along a demand curve happen
takes place when the goods price changes.
What are other ways to say movement along a demand curve
extension and contraction
What is the ceteris paribus assumption
assuming that all other variables that may influence demand are held unchanged or constant
What are the conditions of demand aka what shifts the demand curve to a new position (5)
-the prices of a substitute good
-prices of a complementary good
-personal income
-tastes and preferences
-population size
What is a substitute good
an alternative good that could be used for the same purpose
what is a complementary good
when two goods are complements, they experience joint demand
What is a normal good
a good for which demand increases as income rises and demand decreases as income falls
What is an inferior good
a good for which demand decreases as income rises and demand increases as income falls
What is elasticity
measures the responsiveness of a second variable to a change in the first variable
What does it mean if demand is elastic vs inelastic
inelatic is when price changes demand does not change
elastic is when price increase demand decrease and vice versa
What are the three demand elasticities you must know
-price elasticity of demand
-income elasticity of demand
-cross-elasticity of demand
What is the formula for price elasticity of demand
percentage change in quantity demanded/ percentage change in price
What is the formula for income elasticity of demand
percentage change in quantity demanded/ percentage change in income
What is cross-elasticity of demand formula
percentage change in quantity of A demanded/ percentage change in price of B
What is price elasticity of demand
measures consumers’ responsiveness to a change in a good’s price
What does a horizontal demand curve show
perfectly elastic demand
What does a vertical demand curve show
perfectly inelastic demand
What is unit elastic of demand
it is when supply and demand of a product changes proportionally (by the exact same amount) to the change in price
What factors determine price elasticity of demand
-substitute
-income
-necessities or luxuries
-size of the market
-time
What is income elasticity of demand
measures how demand responds to a change in income- depends on whether the good is a normal good or an inferior good
When is income elasticity of demand positive or negative
positive for a normal good
negative for an inferior good
What can normal goods be further divided into
superior goods or luxuries
What is cross elasticity of demand
measures how the demand for one good responds to changes in the price of another good
What are three possible relationships of cross-elasticity of demand
complementary good (or joint demand)
substitutes (or competing demand)
no significant relationship between the goods
What is market supply
Market supply is the quantity of a good or service that all firms or producers in the market plan to sell at different prices
What is profit
the difference between the total revenue the firm receives when selling the goods or services it produces and the cost of producing the good
What could shift the supply curve to a new position (4)
cost of production
technology
taxes
subsidies
What is the only supply elasticity you need to know
price elasticity of supply
What is the formula for price elasticity of supply
percentage change in quantity supplied/percentage change in price
What does it mean if the supply curve intersects the price axis
the curve is elastic at all points and elasticity decreases as you move up the curve
What does it mean if the supply curve intersects the quantity axis
the curve is inelastic at all points and elasticity increases as you move up the curve
What does it mean if the supply curve passes through the origin
elasticity = 1 on all points on the curve
What is market equilibrium
when planned demand equals planned supply aka when demand crosses supply
What is excess supply
when firms wish to sell more than consumers which to buy with the price above the equilibrium price
what is excess demand
when consumers wish to buy more than firms wish to sell, with the price below the equilibrium price
What is joint supply
when production of one good leads to the supply of another good eg killing more cows increases supply for leather
What is joint demand
an increase in demand for one good increases demand for another good
what is composite demand
demand for a good which has more than one use eg crude oil
what is derived demand
when a good is necessary for the production of another good eg machinery and raw materials
