Price determination in a competitive market Flashcards
(28 cards)
Define market
When do competitive markets occur?
Market- a voluntary meeting of buyers and sellers with exchange taking place
A competitive market occurs when there are a large number of buyers and sellers all passively accepting the ruling market price which is set by the interaction of those taking part in the market
What do highly competitive markets not have? what is the significance?
They lack barriers to enter and exit. New buyers and sellers can enter and exit the market easily. there is also a high level of information, people can find out what others are doing easily.
Define
- demand/ effective demand
- supply
Demand- the quantity of goods and services that consumers are willing ad able to buy at given prices in a given time period
Effective demand- desire for product is backed up by ability to pay
Supply- the quantity of goods and services that producers are willing and able to sell at given prices in a given period of time
What is the shape of the demand and supply curves?
What relationship does it show?
The demand curve is downwards sloping. It shows the relationship between price of good and the quantity demanded
The supply curve is upwards slopping. it shows the relationship between price fo a good and the quantity supplied
Difference between market and individual demand
Market demand- quantity of goods or services that all the consumers in a market are willing and able to buy at different market prices
Individual demand- quantity of goods or services that a particular consumer or individual are willing and able to buy at different market prices
What are the determinants of demand, other than price?
- prices of substitute goods (goods in competing demand)
- prices of complementary goods ( goods in joint demand)
- personal disposable income
- tastes and preferences
- population size, influences total market size
What would cause a outwards shift of Demand?
- increase in prices of substitute goods (goods in competing demand)
- fall in prices of complementary goods ( goods in joint demand)
- increase personal disposable income
- successful advertising, making people think more favourable about the good
- increase in population size
What is a
- normal good
- inferior good
Normal good - a good for which the demand rises when incomes rise. Has a positive income elasticity YED>0
Can be a luxury good- an increase in income leads to a larger increase in demand YED>1
Inferior good- demand for the good falls when incomes rise. Has a negative income elasticity YED<0
What is meant by elasticity?
The proportionate responsiveness of a second variable to an initial change in the first variable.
Elastic- an increase in price leads to a greater than proportional change in quantity. Very responsive
Inelastic- an increase in price leads to a less than proportional change in quantity. Not responsive
What is price elasticity of demand?
What is income elasticity of demand?
What is Cross elasticity of demand?
Price Elasticity of demand- measures the extent to which the demand for a good changes in response to a change in the price of that good
Income elasticity of demand- measures the extent to which the demand for a good changes in response to a change in the income
Cross elasticity of demand- measures the extent to which the demand for a good changes in response to a change in the price of another good
What is the formula for
-PED
-YED
-PES
-XED
Price elasticity of demand (PED) = % change in Q.D. / % change in Price
Price elasticity of Income (YED) = % change in Q.D. / % change in Income
Price elasticity of Supply = % change in Q.s. / % change in Price
Cross-elasticity of demand = % change in Q.D. of good A / % change in Price of good B
What would a graph for
-perfectly elastic
-perfectly inelastic
look like?
Perfectly elastic- horizontal line
Perfectly inelastic- Vertical line
Why is substitutability a determinant of price elasticity of demand?
- SUBSTITUTABILITY- most important determinant. When a substitute exists, consumer responds to price by switching expenditure away from the good and buys the substitute, demand is very elastic if close substitutes exists
Why is percentage of income a determinant of price elasticity of demand?
- PERCENTAGE OF INCOME- demand curves for goods that are a large proportion of income are more elastic. this is because for items that are small proportions, rarely brought, people hardly notice an increase in price on the item
Why is necessities or luxury a determinant of price elasticity of demand?
- NECCESSITIES OR LUXURY- it is often said luxury goods are elastic and necessary goods are inelastic. However it is mainly the lack of substitutes for necessities that makes them price inelastic.
Why is width of the market a determinant of price elasticity of demand?
- WIDTH OF THE MARKET- the wider the market, the lower the price elasticity
Why is time a determinant of price elasticity of demand?
- TIME- for many goods demand id more elastic in the long run and more inelastic in the short run. In the short run, it takes time to notice and respond to a price change. cannot just quickly switch all the time
What is the difference between
-short run
-long run
Short run- the time period in which at least one factor of production is fixed and cannot be varied
Long run- the time period on which no factors of production are fixed and they can all be varied
What is market supply?
The quantity of a good or service that all the firms in the market plan to sell at given prices at given times
Define
-profit
-total revenue
Profit- the difference between total sales revenue and total costs of production
Total revenue- all the money received by a firm from selling its total output
What are the determinants of supply?
Costs of production
- wage costs
- raw material costs
- energy costs
- costs of borrowing
Technical progress
Taxes imposed on firms such as VAT
Subsidies granted by the government to firms
Factors affecting the Price elasticity of supply
- Length of production period- supply more elastic for goods that cant be made quickly and agricultural goods
- Availability of spare capacity- if labour, raw materials and spare capacity are readily available, production can be increase quite quick in the short run
- Ease fo switching between production methods- supply more elastic if firms can quickly alter the way the produce goods
- Number of firms in the market- more firms in the market, easier to leave/enter market, more elastic supply
- Time- more elastic in the long run
What is market equilibrium and market disequilibrium?
Market equilibrium- a market is in equilibrium when planned demand = planned supply (prices do not change). At the intersection of demand and supply curves
Marker disequilibrium- exists at any price other than equilibrium price, when
planned demand < planned supply- prices fall
planned demand > planned supply- prices rise
Define
-excess supply
-excess demand
Excess supply- when firms wish to sell more than consumers wish to buy, with price above equilibrium price
Excess demand- consumers wis to buy more than firms wish to sell, with he price below equilibrium price
