Price Determination In A Competitive Market Flashcards
What does the demand curve show?
The relationship between price & quantity demanded
What are reasons for change in demand?
PACIFIC
-Population
-Advertising
-Competitors price
-Income
-Fashion/taste
-Interest rates
-Competitors price
What is price elasticity of demand (PED) ?
It is a measure of how responsive demand is to a change in price
How to calculate PED?
%change in q demanded/ % change in price
What do the values of PED mean?
Perfectly elastic demand = infinite
Elastic demand >1
Unit elastic demand = 1
Inelastic demand < 1
Perfectly inelastic demand = 0
What is a substitute good?
alternative goods that could be used for the same purpose
What is a complementary good?
When two goods are complements, they experience joint demand.
The increase in demand of one good increases the demand of another, because they are bought together.
(e.g cameras & SD cards)
What is a normal good?
A good for which demand increases as income rises and demand decreases as demand falls
(e.g food, clothing. household appliances)
What is an inferior good?
a good for which demand decreases as income rises and demand increases as income falls
(e.g mo name grocery store products)
Factors affecting price elasticity?
- Availability of substitutes
- Proportion of income
- Necessities vs luxuries ( if the luxury good has no substitute it may still have inelastic demand)
What is income elasticity of demand?
It measures the extent to which the demand for a good changes in response to a change in income
Equation for income elasticity of demand?
% change in quantity demanded/ % change in income
Income elasticity of inferior goods?
Its always negative because the quantity demanded of an inferior good falls as income rises
Income elasticity of normal goods?
It is always positive because the quantity demanded of a normal good rises with income
What is cross elasticity of demand?
Measures the extent to which the demand for a good changes in response to the change in the price of another good?
How to calculate cross elasticity of demand?
% change demanded good A / % change demanded good B
What kind of demand do substitute goods have?
Competitive demand.
When the price of a normal good increases, demand for the inferior good increases. vice versa
What do the values of XED mean?
-1<XED<1 weak relationship
<-1 complementary goods
> 1 substitute goods
What are the conditions of supply?
PINTS WC
-Productivity
-Indirect taxes (VAT, excise duties, rates, regulations)
-Number of firms
-Technical changes
-Subsidies by government
-Weather
-Costs of production (Wages, Raw materials, Energy, Interest rates)
What is price elasticity of supply?
It measures the extent to which the supply of a good changes in response to a change in the price of that good
How to calculate PES?
% change in Q supplied/ % change in P
What do the values of PES mean?
- PES = infinity, perfectly elastic supply
- PES > 1, elastic supply
- PES = 1, unit elastic supply
- PES < 1, inelastic supply
- PES = 0 perfectly inelastic supply
Factors affecting PES?
- Length of production period
- Availability of spare capacity ( if labour/raw materials are readily available)
- Ease of accumulating stock (cost of storing unsold finished goods, or buying from suppliers)
- Ease of switching between alternative methods of production
- Barriers to entry
What is joint supply?
When one good is produced, another good is produced from the same raw materials (as a by product)
(e.g cows used for beef & milk)
