Price Determination in a Perfect Market Flashcards
What is Supply and how does it relate to market price?
- The quantity of a good or service producers are willing and able to provide to the market at a given price.
- Supply and price are directly proportional as price acts as an incentve to producers who seek tomake profit.
What is Demand and how does it relate to market price?
- The quantity of a good or service consumers are willing and able to purchase at a given price.
- Demand and price are inversely proportional as consumers ration their spending as prices rise, reducing demand.
How is price determined in a perfect market?
At market equilibrium supply equals demand
This balances the incentives provided to consumers and producers and determines the market price
What is the rationing function of demand
As price increases, goods become less attractive to consumers, causing demand to fall as they are less willing to purchase them.
What is the incentive function of supply?
As prices increase, the potential to make profit increases, this encourages suppliers to produce more and raise supply to the market.
What is the signal function of price
The market price indicates to buyers and sellers the value of the good or service. Thkis influences their decisions to produce or consume, based on whether they think they are going to get a larger benefit than cost.
What is consumer and producer surplus
The surplus is the difference between the maximum (consumer) or minimum (producer) price which the economic agent would be willing to accept, and the market price. This represents the welfare they gain from the transaction.
Graph and Definition
What is income elasticity of demand?
Graph showing Demand curve for inferior, luxury, and normal goods
Income elasticity is the responsiveness in demand to a change in consumer disposable incomes.
Graph and Definition
What is Cross PED?
Graph, upward sloping for competitive goods
xPED: The responsiveness of demand for a good to changes in the price of a good in competitive demand
Graph and Definition
What is derived demand?
Derived demand is where a demand increase for a good creates demand for another good used in its production.
Graph and definition
What is joint demand?
Joint demand is where goods used together, like bread and butter, experience demand changes based on demand for the other, similar to derived demand.
Graph and definition
What is competitive demand?
Competitive demand is where goods are direct substitutes for one another, meaning an increase in demand for one will lower demand for the other.
How does disequilibrium lead to changes in price
Excess supply or demand leads to a signal being sent to producers to modify prices. For example, a firm which consistently sells out of a product, will increase its price to maximise profit. since demand > supply
