Price Determination In A Competitive Market Flashcards by Georgie Elliott

Describe unitary elastic demand?

Percentage change in demand equal to percentage change in price

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Describe strong subsitutes?

In terms of demand and price for good X and good Y

Small rise in price of X caused a large rise in demand for Y

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What is cross elasticity of demand?

Cross elasticity of demand between two goods or services indicates the nature of demand relationships between the goods

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What income elasticity of demand does a basic good have?

Income elasticity of demand is between zero and one

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Describe time period?

More sensitive to price over long periods of time

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When price is unit elastic (1) and a firm raises prices, what happens to revenue?

Total revenue remains the same

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Equation of cross elasticity of demand?

% change in quantity of A demanded
/
% change in the price of B

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When price elasticity of demand is one, what is it?

Demand is unit elastic

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What does elastic price elasticity of supply mean?

Firms can increase supply quickly at little cost

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Describe basic goods income elasticity of demand?

Smaller rate of rise when income increases

E.g. Shoe polish

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When price elastic and a firm raises its prices, what happens to total revenue?

Total revenue decreases

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What is unit elastic?

% change in demand is the same as % change in price

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When goods are substitute what is their demand described as?

Joint demand

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Describe superior good’s income elasticity of demand?

They have a greater rate of rise when income increases

E.g. Luxury car

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Define inelastic demand?

If total consumer expenditure remains constant in response to a price fall, demand is inelastic

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Descrive perfectly inelastic demand (0)?

Demand does not change when price changes

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Describe income?

Proportion of income spent on good

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Equation for income elasticity of demand?

% change in quantity demanded
/
% change in income

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Describe strong complement?

In terms of demand for good X and good Y

Small fall in price for X causes large rise in demand for Y

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Factors that determine price elasticity of supply?

Spare capacity (spare resources / full capacity)
Time scale (short run inelastic / long run elastic eg employing more capital)
Substitutability factors (ability to change way to produce goods)
Level of stocks (storage / diverting current production)

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When price elasticity of demand is between zero and one, what is it?

Demand is inelastic

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Describe substitutes?

More viable substitutes, more demand is going to be sensitive to change in price

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When price elasticity of demand is zero, what is it?

Demand is perfectly inelastic

Describe weak substitute?

In terms of demand and price for good E and good F

Large rise in price of E caused a small increase in demand for F

What does perfectly inelastic price elasticity of supply mean?

Supply is fixed so if there is a change in demand it can't be easily met

Descrive price elasticity of demand between zero and one (inelastic)?

The percentage change in demand is less than the percentage change in price

What is the formula for cross price elasticity of demand?

Percentage change in quantity demand for A / Percentage change in price of B

When price is elastic and a firm lowers its price, what happens to revenue?

Total revenue increases

What would tend to make the price elasticity of demand for a product low?

Good is essential Good has few substitutes Product has strong brand name Good only takes a small share of incomes

Describe perfectly elastic demand (when the value is above 1)?

Demand is affected to a greater degree by changes in price

Formula for price elasticity of demand?

Change in quantity / Change in price

Describe weak complement? | In terms of demand for good E and good F

Large drop in price of E causes only a small rise in demand for F

What does perfectly elastic price elasticity of supply mean?

Any quantity demanded can be met without changing the price

What does income elasticity of demand depend on?

Whether the good is Normal Or inferior

Price elasticity of inelastic and a firm raises its price, what happens to revenue?

Total revenue increases

What does inelastic price elasticity of supply mean?

An increase in supply will be expensive for firms and takes a long time

What is the formula for total revenue?

Quantity times price

Examples of goods with a strong positive income elasticity of demand?

Fine wine Sports cars Consumer durables e.g. Smart phones Leisure facilities

What is the formula for income elasticity of demand?

Percentage change in demand / Percentage change in income

What is the formula for price elasticity of supply?

Percentage change in quantity supplied / Percentage change in price

When do inferior goods exist?

When superior goods are available

When demand is inelastic, describe revenue?

A rise in price leads to a rise in total revenue

Determinants of price elasticity of demand?

Habit formation Income Time period Substitutes

Describe a price elasticity of demand between zero and one relationship?

% change in demand from A to B is smaller than the percentage change in price

What income elasticity of demand does a superior good have?

Income elasticity of demand is greater than 1

Describe habit formation?

Addiction to product | Brand loyalty to product

Do substitute goods have positive or negative cross elasticity of demand?

Positive cross elasticity of demand If the price increases demand for that good will fall as consumers switch to another brand

What is price elasticity of demand?

Sensitivity or responsiveness of quality demanded of a good or service to a change in its price

price elasticity of demand of 0?

demand does not change when price changes demand is perfectly inelastic

composite demand

demanded for two or more distinct uses

when does an increase in the goods price increase total consumption?

when price elasticity of demand for a good is less than one

what does the imposition of a tax do?

shifts supply curve of a good to the left

what does the abolition of a tax on a good do?

shifts the supply curve of the good to the right

incentive function of prices

motivates a producer or consumer to do something producers provided with possibility of more revenue and profit

signalling function of prices

``` signals to firms and consumers rise in price following a rise in demand signals more good is required incentive to join market make higher profits scarce resources allocated to market ```

rationing function of prices

increase in price of good as it becomes more scarce consumers rationed out of market no longer afford good