Price Determination in a Competitive Market Flashcards
Equilibrium Price
The price at which planned demand for a good or service exactly equals planned supply
Supply
The quantity of a good or service that firms are willing and able to sell at given prices in a given period of time
Demand
The quantity of a good or service that consumers are willing to buy at given prices in a given period of time
Effective Demand
The desire for a good or service backed by an ability to pay
Market Demand
The quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices
Condition of Demand
A determinant (or factor) of demand: other than the good’s own price, that fixes the position of the demand curve
What are the factors of demand?
Population, Advertising, Substitute Goods, Income, Fashion, Interest Rates and Complimentary Goods
What shows an increase in demand?
A rightward shift of the demand curve
What shows a decrease in demand?
A leftward shift of the demand curve
Normal Good
A good for which demand increases as income rises and demand decreases as income falls
Inferior Good
A good for which demand decreases as income rises and demand rises as incomes fall
Elasticity
The proportionate responsiveness of a second variable to an initial change in the first
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
The steeper the graph, the ________ the Demand.
More inelastic
The shallower the graph, the _________ the Demand.
More elastic
What is is the demand price elasticity of a good/service which is inelastic?
-1
What is is the demand price elasticity of a good/service which is elastic?
-1>
Income elasticity of demand
measure the extent to which the demand for a good changes in response to a change in income.
Income elasticity of Demand (Formula)
Percentage change in quantity demanded/Percentage change in income
Cross elasticity of Demand
Measure the extent to which the demand for one good changes in response to a change in the price of another good
Cross elasticity of demand (Formula)
Percentage change in quantity demanded of X/Percentage change in the price of Y
What type of good is in joint supply?
Complementary Goods
What type of good is in competing demand?
Substitute Goods
Market Supply
The quantity of a good or service that all firms plan to sell, at given prices, in a given period of time.
Profit
The difference between total sales revenue and total costs of production
Total revenue
The money a firm receives from selling it output, calculated by multiplying the price by the quantity sold
Conditions of supply
Determinants (factors) of supply, other than the goods own price, that fix the position of supply
Factors of Supply:
Productivity, indirect taxes, number of firms in the market, technology, subsidies, weather, costs of production
What shows an increase in supply?
A rightward shift of the supply curve
What shows a decrease in supply?
A leftward shift of the supply curve
Price elasticity of supply
Measures the extent to which the supply of a good changes in response to a change in the price of that good
Price elasticity of supply (formula)
Percentage change in quantity supplied/Percentage change in price
The steeper the graph, the__________ the supply.
More inelastic
The shallower the graph, the ___________ the Supply.
More elastic
What are the factors of Demand Elasticity?
Substitutability, Percentage of income, Necessity/luxury, the width of the market, time
What are the factors of Supply Elasticity?
Length of the production period, availability of spare capacity, ease of accumulating stocks, ease of moving between production methods, ease of entering a market,m time
When is demand more elastic?
In the long run, because it takes time to respond to price change
When is supply more elastic?
In the long run, as it takes time for firms to respond to higher output
Equilibrium
A state of rest or balance between opposing forces (supply and demand curve)
Disequilibrium
A situation in a market where there is excess supply or excess demand
Market Equilibrium
A market is in equilibrium when planned demand equals planned supply and the demand curve crosses the supply curve. In this situation, there is no excess demand or excess supply in the market. Unless an event disturbs the equilibrium, there is no reason for the price to change.
Market Disequilibrium
Exists at any price that isn’t the equilibrium price. When the market is in disequilibrium, either excess demand or excess supply exists in the market. Excess demand causes the price to rise until a new equilibrium is established. Conversely, excess supply causes the market price to fall until a new equilibrium is achieved.
Excess supply
When firms wish to sell more than consumers wish to buy, with the price above the equilibrium point
Excess Demand
When consumers wish to buy more than firms wish to sell, with the price below the equilibrium point
Joint Supply
When one good is produced, another good is also produced from the same raw materials
Competing supply
When raw materials are used to produce one good, they cannot be used to produce another good
Complementary Good
A good in joint demand, or a good which is demanded at the same time as another good
Substitute good
A good in competing demand, namely a good which can be used in place of the other
Composite Demand
Demand for a good that has more than one use
Derived Demand
Demand for a good which is input into the production of another good
Productive efficiency
For the economy as a whole occurs when it is impossible to produce more of one good without producing less of another. For a firm, it occurs when the average total cost of production is minimised
Allocative efficiency
Occurs when the available economic resources are used to produce the combination of goods and services that best match people’s tastes and preferences
Merit Good
A good which when consumed leads to benefits which other people enjoy or a good for which long term benefits of consumption exceeds the short-term benefit enjoyed by the person consuming the good.
