Y1 Price determination in a competitive market Flashcards
Market
A place that brings buyers and sellers together
Demand
How many buyers are willing and able to pay
Law of demand
Demand rises as price falls
Income effect
If income is fixed, then when price falls, real incomes and demand will rise
Substitution effect
If the price of a good rises, the demand for its subs will increase
Supply
The quantity offered for sale at a given price
PASIFIC
Population
Advertising
Substitutes
Income
Fashion
Interest rates
Complements
PINTS WC
Productivity
Indirect tax
Number of firms
Technology (=better productivity)
Subsidies
Weather
Cost of production
PED
Proportional responsiveness of demand to a change in price
>1 is elastic
1 is unit elastic
<1 is inelastic
Velbem goods
Demand increases when price increases
Factors of PED
Strength/number of subs
Luxury or necessity
Addictive
Income percent
Length of time of consideration
PES
Proportional responsiveness of supply to a change in price
>1 is elastic
=1 is unit elastic
<1 is inelastic
Factors of PES
Length of production time
Spare capacity
Stock level
Substitutability of FoP
Time period of change to market
Barriers to supply
Consumer surplus
Difference between what consumers are prepared to pay and what they actually pay
Producer surplus
Difference between what producers are prepared to sell for and what they actually sell for
Types of tax
Indirect - On spending (VAT)
Direct - On income (Income tax)
Types of indirect
Specific - Set amount per unit
Ad valorem - Percent extra on each unit
Reasons for subsidy
To lower price
To increase supply
Protect jobs
Reduce unemployment
Joint demand
When goods are demanded together (complements)
Composite demand
Demand for a good that has multiple uses
Joint supply
When production of one results in production of another
Derived demand
Increased demand means increased need for land/labour
XED
Proportional responsiveness of demand of a good to a change in price of a different good
Positive=Subs
Negative=Complements
YED
Proportional responsiveness of demand to a change in incomes
>1 is luxury good
Between 0&1 is normal good
Negative is inferior good
Invisible hand
Individuals working in their own interest will create an optimal market
Adam Smith 1776
Consumer sovereignty
Consumer preference decides what is produced
Allocative efficiency
When the quantity produced is where D=S
Productive efficiency
Every resource used to its full potential
(average cost minimised)
Dynamic efficiency
Small, consistent improvements to efficiency over time
