Unit 2- Price Determination in a Competitive Market Flashcards
What is market demand?
The quantity of a good or service that all consumers in a market are willing and able to pay for at different market prices
What is a veblen good?
A good that defies the laws of demand
What are the conditions that affect demand?
Changes in income- normal goods will see a positive correlation with demand but inferior goods will have a negative correlation with demand
Prices of substitutes- when the price of a competing product changes there is likely to have a change n demand
Prices of complementary products- if the price of a complementary product increases the demand of the good is likely to fall
Tastes and preferences
Population size
Advertising and publicity
What is the law of supply a positive correlation?
There is a profit motive for a businesses
When the market price increases it signals to firms that they can make more profit which creates incentive to increase output
What are the determinants of supply?
Cost of production- changes the incentive to supply
Technical progress- new technology could lead to lower production costs and greater efficiency
Taxes imposed on firms- act to incentive production
Subsidies- Reduces costs and encourages an increase in supply
Expectations about future prices
Regulation
Number of sellers in the market
What is market equilibrium?
Where planned demand equals planned supply and the demand curve crosses the supply curve
What is consumer surplus?
The difference between the amount buyers are prepared to buy and what they actually buy
What does the price mechanism do?
Signal
Incentivise
Ration
What are the different reasons for changes and shifts in the market?
Condition of supply or demand changes
Disequilibrium as excess of supply or demand
Pressure for prices to raise and fall
Extension or contraction of supply or demand
New market equilibrium
What are the different interrelationships between markets and their definitions?
Joint supply- one good is produced and so is another good from the same raw material
Competing supply- raw materials are used to produce one good and so they cannot be used to make another one
Complementary goods- a good in joint demand
Substitute good- a good in competing demand
Derived demand- demand for a good which is an input into the production of another good
What is income elasticity of demand?
Can be positive or negative
Normal goods- positive income elasticity of demand
Necessities- have a value of 0-1 so they are inelastic
Luxuries- positive income elasticity of demand and are elastic
Inferior goods- negative income elasticity of demand and has many substitutes
What is cross price elasticity of demand?
Measures the extent to which demand for a good changes in response to a change in the price of another good
Positive- substitute goods
Negative- complementary goods
% change in demand/ % change in price of another good
What are the factors affecting price elasticity of supply?
Does a firm have spare capacity to expand output quickly?
Can the firm release or accumulate stocks efficiently?
How easy is it for a firm to alter the way they produce goods?
How many firms are in a market and how easy is it to enter a market?
Are there sufficient raw materials?
What is the length of the production period?
