Section 2: Competitive Markets Flashcards
What is the price sold for a product decided by
The demand and supply in the market
What is demand
Demand is the quantity of a good/service that consumers are willing and able to buy at a given price, at a particular time
What are normal goods
Goods where the demand increases when the real income of the consumer increases
What is the x and y axis in a demand curve
x = quantity
y = price
What are inferior goods
Goods where the demand decreases when the real income of the consumer increases
What would happen to the demand curve of luxury items if there was a more equal distribution of income
Shift to the left (decrease in demand) because there would be less rich people to buy luxury items
What are substitute goods
Goods that are alternatives to each other
What do interrelated markets mean
Changes to one market affect another one
What is derived demand
Demand for a good or a factor in production used in making another good or service
What are complementary goods
Goods that are used together - in joint demand
What is composite demand
When a good is used for more than one purpose
What is the formula for PED
PED = Percentage Change in Quantity Demanded / Percentage Change in Price
When referring to changes in the amount of demand what terms are you supposed to use
Contraction
Expansion
What is the price elasticity of demand
It is a measure of how the quantity demanded of a good responds to a change in price
What are the three types of PED
Elastic
Inelastic
Unit Elastic
What is Elastic demand
When the PED is greater than one
What is Perfect Elastic Demand
When the PED is +/- infinity
This means that any price increases will take the demand to 0
Describe the relationship between price and quantity demanded when the demand is elastic
The price change will have a larger effect on quantity demanded
What is Inelastic Demand
When the PED is greater than 0 but less than 1
Describe the relationship between price and quantity demanded when the demand is inelastic
The price change will have a smaller effect on quantity demanded
What is Perfect Inelastic Demand
Has a PED of 0 and any change in price will have no effect on on the quantity demanded
What is Unit Elasticity of Demand
When the PED = +/-1
Describe the relationship between price and quantity demanded when the demand when the good has unit elasticity
When the percentage change in price is equal to the percentage change in quantity demanded
What is Income Elasticity of Demand
It measures how much the demand for a good changes with a change in real income