Section 2 - Price Determination in a competitive market Flashcards
Market
Any place or process that brings together buyers and sellers with a view of agreeing a price
Demand
Amount that buyers are willing and able to purchase at a given price in a given time period
Ceteris Paribus
Everything else held constant
“Law of Demand”
More will be demanded as price falls
Factors of demand
Things other than price which affect the demand causing the curve to shift
PED
Measures the proportional responsiveness of demand to a change in price of a good
YED
Measures the proportional responsiveness of demand to a change in consumers income
XED
Measures the proportional responsiveness of the demand for a good to a change in price of another good
Revenue
The income that a firm receives from a sale of a good or service to its customers
Supply
The quantity of a good / service producers are willing and able to produce at a given price in a given time period
Factors of supply
Things other than price which affect the supply causing the curve to shift
PES
Measures the proportional responsiveness of the quantity supplied to a change in price
Equilibrium
The price at which quantities demanded and supplied are equal
Consumer surplus
The difference between how much buyers are willing to pay and what they actually pay
Producer surplus
The difference between the market price and the lowest price at which the firm is prepared to supply
Welfare economics
Optional allocation of resources/ goods and how this affects social welfare.
Tax
Compulsory payment to the government
Indirect taxes
Taxes on spending
Specific Tax
A tax placed on a good/service which is a specific amount of money produced per unit bought
Ad valorem Tax
A tax placed on a good/service which is a percentage of a price, e.g VAT
Direct Taxes
Taxes on incomes
Subsidy
A payment made to the producer by the government to encourage/ increase production and lower price
Joint demand
When goods are demanded together e.g. printer and ink cartridges
Composite demand
When the good demanded has more than one use e.g. milk
Derived demand
When the demand for one good is linked to the demand for a related good e.g. labour
Substitutes
A good that can demanded in place of another
Joint Supply
increasing the supply of one good causes and increase/decrease in the supply of another good
Minimum prices
Set above the equilibrium price and it would be illegal to sell below that price
Maximum prices
The price is not allowed to rise above a certain level
Surplus
When supply is greater than demand
Shortage
When demand is greater than supply
The price mechanism
The means by which decisions of consumers and businesses interact to determine the allocation of resources
The invisible hand
Letting free markets do their thing
Consumer sovereignty
The idea that it is consumers who influence production decisions
Signalling function
Changes in price provide information to both producers and consumers about changes in market conditions
Incentivising function
When the price of the product rises, quantity supplied increases as businesses respond
Allocating function
Allocating scarce resources among competing uses
Rationing function
When there is a shortage of a product, price will rise and deter some consumers from buying the product
Static efficiency
Occurs when resources are allocated efficiently at one point in time
Allocative efficiency
When the right amount of resources goes into the market
Productive efficiency
When the optimal combination of inputs produce the maximum amount of output
Dynamic efficiency
Resources are allocated efficiently over time
Inferior goods
A good whose demand drops when people’s incomes rise.
Complements
A good whose use is related to the use of an associated or paired good e.g. the demand for one good (printers) generates demand for the other (ink cartridges).
Dead-weight Loss
A cost to society created by market inefficiency
Market Forces
refer to supply and demand, which determine the allocation of scarce resources and the relative prices of goods, services, and assets in a market economy.
PED equation?
percentage change in quantity demanded / percentage change in price
The price elasticity will usually be…
negative.
DEMAND
Perfectly Elastic?
Elastic?
Unit Elastic?
Inelastic?
Perfectly inelastic?
Infinity
>1
=1
<1
0
What are the 5 factors affecting PED?
Strength and number of substitutes; Luxuries/necessities; Addictive/Habit forming; Percentage of Income; Time period under consideration
Demand is said to be inelastic when…
the percentage change in price exceeds the percentage change in quantity demanded of a good
PES equation?
percentage change in the quantity supplied/ percentage change in the price
SUPPLY
Perfectly elastic?
Elastic?
Unit elastic?
Inelastic?
Perfectly inelastic?
Infinity
>1
=1
<1
0
What are the 6 factors affecting PES?
Length of the production period; The amount of spare capacity; Levels of stocks; Substitutabilty of Factors of Production; Time period/ time lags; Artificial barriers to supply e.g Patents
XED Equation?
% change in quantity demanded of good A / % change in price of good B
