Yr1 Price Determination in a Competitive Market Flashcards
PART 1
THE DETERMINATION OF THE DEAMDN FOR GOODS AND SERVICES
What’s the definition of demand?
The quantity of a good or service that buyers would wish (willing and able) to purchase at each conceivable price
What does the law of demand state?
The law of demand states there is an inverse relationship between quantity demanded and the price of a good or service (ceteris paribus)
What does ceteris paribus mean?
All other factors stay the same (are constant)
What does a change in prices cause on the demand curve?
Movement ALONG the demand curve
- If the price increases on the demand curve, what happens to the demand curve?
- Vice versa with price decrease
- Contraction in demand
- Extension in demand
On the demand curve, are supply and demand inversely proportional or proportional?
Inversely proportional
What is the acronym for causes in shifts in the demand curve?
PIRATES
What does PIRATES stand for in terms of demand and the causes of the shifts in demand?
Population
Income
Related goods (substitutes/ complements)
Advertising
Tastes and fashions
Expectations of future price changes
Seasons
PART 2
PRICE, INCOME AND CROSS PRICE ELASTICITY OF DEMAND
What is the definition of PED?
The responsiveness of the quantity demanded of a product to a change in its price
What is the formula for PED + what does he number reveal about the product + diagram
PED = (% change Qd)/ (%change P)
Where Qd > P - elastic + shallow demand curve
Where Qd < P - inelastic + steep demand curve
What are the determinants of PED elasticity?
- The number and availability of substitutes
- Marketing in general, and branding and advertising
- Proportion of income spent on the product
- The degree of habit
- The time period
What is the definition of income elasticity of demand? (YED)
The responsiveness of demand to changes in income
What happens to a
1. Normal good
2. Inferior good
as incomes rise
Also which way does the demand curve slope?
- Demand rises + curve slopes upwards
- Demand falls + curve downwards sloping
What is the YED formula + what do the results mean?
(% change in Qd) / (% change in income)
+ means normal good
- means inferior good
Elastic > 1
Inelastic 0 < YED < 1
What is the definition of cross elasticity of demand (XED)?
The responsiveness of demand of one goods to changes in the price of a related good > either a complement or a substitute
What is the XED formula? Interpret the result
% change in Qd of good X / % change in price of good Y
+ means substitute (positive relationship)
- means complement (inverse relationship)
XED BUSINESS SIGNIFICANCE
1. If goods are a complement
2. If goods are a substitute
1.
- businesses could ‘bundle’ them together and sell as a package
- takeover businesses that sell complements/ works closely with them
- businesses may use brand proliferation to weaken the degree of suitability
- engage in heavy advertising or price wars
What is the importance of elasticity? (4)
- Relationships between changes in price and total revenue
- Influences the behaviour of a firm
- Importance of determining what goods to tax
- Importance of analysing time lags in production
What are the key factors of elasticity? (5)
- The number of close substitutes available for consumers
- Price of product in relation to total income
- Cost of substituting between different products
- Brand loyalty and habitual consumption
- Degree of necessity/luxury
Inelastic products
- What makes it one of them
- Show the correlation between price and revenue
- no substitutes
- good customer perception
- doesn’t vary depending on income
- high brand loyalty
- incr price > incr revenue
- decr price > decr revenue
Positive correlation
Elastic products
- What makes it one of them
- What’s the relationship between price and revenue
- lots of substitutes
- varies depending on peoples income
- lack of brand loyalty
- decr price > incr renvue
- incr price > decr revenue
Inverse relationship
PART 3
THE DETERMINANTS OF THE SUPPLY OF GOODS ANS SERVICES
What is the definition of supply?
The quantity of a good that sellers wish (willing and able) to sell at each possible price
How does incentive link to supply?
Businesses wont supply goods unless the price is high enough to provide INCENTIVE (profit motive)
> produce more lucrative goods
What is the acronym for causes in shifts in the supply curve?
PINTS WC
What does PINTS WC stand for when linked to the causations of shifts in the supply curve?
Productivity improvements
Indirect taxes
Number of firms (competition)
Technology (improvements)
Subsidy (payments to firms > usually gov to incr production)
Weather
Cost of Production
What direction does the supply curve travel in?
Horizontally upwards
What is the relationship between price and quantity in the supply curve?
Proportional > positive correlation
- Direction of a positive shift in supply
- Negative
- Right
- Left
- What does a positive shift in the supply curve mean?
- Negative shift (vice versa)
- Incr supply
Incr quantity
Incr price - Decr supply
Decr quantity
Decr price
PART 4
PRICE ELASTICITY OF SUPPLY
PES
- Definition
- Equation
- What >1, >1 and =1 mean in the answer to the equation
- What does it mean when PES equals 0 or ♾️
- Measures how responsive supply is to a change in price
- % change Qs/ % change P
- < 1 inelastic
> 1 elastic
= 1 unitary - 0 = perfectly inelastic
♾️ = perfectly elastic
What are the 6 factors determining PES?
- Length of production period
- Availability of spare capacity
- Ease of accumulating socks
- Ease of switching between alternative methods of production
- Number of firms in the market + ease of entering the market
- Time
What does SATS stand for when linking to factors determining PES?
Spare capacity
Availability of FofP
Time
Stock availability
What happens with each factor of production when price is inelastic supply and when price is elastic supply
1. Spare capacity
2. Stock availability
3. Time
4. Availability of FofP
- Inelastic > full capacity
Elastic > spare capacity - Inelastic > low level stocks, no surplus, goods to sell
Elastic > stocks available - Inelastic > short run as fixed capital, have to do innovation to improve technology long term elastic > varied capital long term
- Inelastic > resources already maximised + finite resources e.g. highly skilled workers
Elastic > easy to employ more FofP
PART 5
THE DETERMINATIONS OF EQUILIBRIUM MARKET PRICES
PART 6
THE INTERRELATIONS BETWEEN MARKETS
What is the definition of joint supply?
When one good is produced, another good is also produced from the same raw materials
What is competing supply?
When raw materials are used to produce one good, they cannot be used to produce another good
What is composite demand?
Demand for a good which has more than one use
What is derived demand?
Demand for a good which is an input into the production of another good
In the market interrelationships diagram, what part is consumer surplus and which part is producer surplus?
Top triangle > consumer surplus
Bottom triangle > producer surplus
