Price determination in a competitive market Flashcards
PED
Measures the responsiveness of demand given change in price . (Q/P)
Determinants of PED
-Substitutes:more substitutes
-Perentage of income
-Luxury/necessity
-Addictiveness
-Time period
PES
Measures the responsiveness of quantity supplied given a change in price(%Qs/%P)
Determinants of PES
Production lag
Stocks
Spare capacity
substituability of FoPs
Time periods
End goal is to make supply elastic
YED(Income elasticity of demand)
measures the responsiveness of quantity demanded given a change in incomes(%Q/%Y)
Cross elasticity of demand(XED)
measures the responsiveness of quantity demand of good A due to change in the price of good B. (%QA/%PB)
Excess demand
Prises rises to reduce demand until equilibrum is reached
Excess Supply
Price falls to increase demand until equilibrium is reached
Price mechanism function
Signals price too high/low
Incentives to change prices
Rations excess demand/supply
Allocates source resources
Rationing
-prices serve to ration sation scarce resources when market demand out strips supply
-provides info to both producers and consumers about market
Critisism of Price mechansim
Allocate-
Rationing- is it ethical to ration resources in this way e.g healthcare
Signalling- assumption of perfect information for all stakeholders
Incentives- barriers to entry in and out of market
Complementary Goods
-Demand for one good affects demand for another.
-In joint demand
Substitue goods
Changes in price of one good affect demand for another
Derived Demand
Demand for a good that is an input for another good
Composite Demand
Demand for a multi-purpose good
