Price Determination in a Competitive Market Flashcards
Equilibrium
No excess supply or demand within a market
Disequilibrium
Excess supply or demand within a market
Factors that shift the demand curve (7)
Population, Income, Related Goods (substitutes/complements), Advertising, Tastes and fashion, Expectations, Seasons
Law of Diminishing Marginal Utility
A law that states for each extra unit of consumption, the marginal utility falls
Elasticity
The responsiveness of a second variable due to a change in the first variable
Price Elasticity of Demand (with equation)
The responsiveness of a change in demand to a change in price.
PED = % change in quantity / % change in price
Factors that influence PED (6)
Necessity, Substitutes, Addictiveness/Habit, Proportion of income spend, Durability of good, Peak and Off-Peak demand
How does the Proportion of Income affect PED
If a good/service is cheap then it is likely to be price inelastic but if something is more expensive (takes up larger proportion of income), then it is likely to be more price elastic
Income Elasticity of Demand (with equation)
The responsiveness of a change in demand to a change in income
YED = % change in quantity / % change in income
Inferior Goods
These are goods that are demanded less when income increases
YED < 0
Normal Goods
These are goods where demand increases when income increases
YED > 0
Superior/Luxury Goods
These are goods which are demanded more when income rises, bigger increase in demand when income rises
YED > 1
Cross Elasticity of Demand (with equation)
The responsiveness of a change in demand of good A to a change in price of good B
XED = % change in quantity of A / % change in price of good B
Substitutes
These are the alternatives available for a certain good/service
Complements
These are goods/services which are consumed at a time or along with one another
Joint Demand
The demand for complementary goods/services, demand for one good/service results in more demand for a related good/service
Competitive Demand
The demand for substitute goods/services, the demand for one good/service results in less demand for another similar good/service
Derived Demand
Goods demanded only because they are needed for the production of other goods
Composite Demand
Goods demanded for more than one use
Join Supply
A product/process that can yield two or more outputs
