price determination in a competitive market Flashcards
what is a market ?
a market is a voluntary meeting of buyers and sellers, in which both parties are willing to exchange.
define equilibrium
the price at which planned demand for a good or service equals planned supply.
define supply and demand
supply is the quantity of a good or service that producers are willing and able to sell at a given price over a given period of time.
demand is the quantity of a good or service that consumers are willing and able to buy at a given price over a given period time
what does the law of demand state?
the law of demand states that as the price of a good goes up the demand for that god will fall whereas if the price was to fall the demand for the good will rise.
what causes a shift in the demand curve ?
a shift in the demand curve is cause by a change in the conditions of demand .
what are the conditions of demand ?
the conditions are the prices of substitute goods or goods in competing demand, the prices of goods in joint demand or complementary goods, personal income, tastes and preferences, population size
what causes a movement in demand ?
a change in the price of that good.
define normal good and inferior good.
a good for which as income increases demand increases and as income decreases demand decreases. a good for which as income increases the demand decreases and as income decreases demand increase.
what are the exceptions to the law of demand ?
one exception is veblen goods such as stella artois or ferrari’s. these are luxury goods for which demand increases as price increases.
another exception is speculative demand. if the price of a good rises consumers may believe that it will increase in price in the near future and as a result demand is likely to increase.
define elasticity
elasticity is the proportionate responsiveness of a second variable to a change in the first variable
define price elasticity of demand
measures the extent to which the demand for a good changes in response to a change in the price of that good.
what is the equation for three demand elasticities ?
PED = % CHANGE in Qty DEMANDED / % CHANGE in PRICE IED/YED = % CHANGE in Qty DEMANDED / % CHANGE in INCOME CED = % CHANGE in Qty of good A DEMANDED / % CHANGE in Qty of good B DEMANDED
what are the factors determining price elasticity of demand ?
substitutability, the existence of a substitute would mean that demand is more elastic as there are alternatives to the good.
percentage of income, the goods and services on which households spend a large amount of their income on tend to be demand elastic than items that a small amount of income is spent on. This is because consumers don’t generally notice a change in cheaper items but they do in more expensive items. such as a car.
necessities or luxuries, luxuries tend to be elastic if there is other substitutes. necessities are price inelastic if there no substitutes.
time, demand is more elastic in the long run as it takes time to respond to a change in price. however sometimes it can be more elastic in the short run, for example a sudden rise in petrol prices.
define market equilibrium
market equilibrium is when planned demand equals planned supply and the demand curve crosses the supply curve.
define market disequilibrium
this is when planned demand doesn’t equal planned supply, there is excess demand or excess supply.
