Price determination in a competitive market Flashcards
(13 cards)
Define the types of demand
- Effective demand = willing and able
- Latent demand = willing but not able
- Joint demand = complements
- Derived demand = need 1 to make another (labour)
- Composite demand = demanded for >1 use
- Individual demand = D of 1 consumer
- Market demand = total demand of all consumers
What is ceteris paribus
All other things remaining equal (consider factors in an isolated environment where other things are constant, not realistic in the real world market)
What are the causes of shifting demand
- Tastes/preferences
- Income
- Price of other goods
- Population
- Demographic factors
- Interest rates
- Legislation
- Consumer expectations
- Social trends
Explain price elasticity of demand
The reactivity of demand to changes in price
- Equation = %△D/%△£
- Interpretation (always - )
–> Perfectly elastic = ∞
–> Elastic = >-1
–> Unitary = -1
–> Inelastic = <-1
–> Perfectly inelastic = 0
- PHAT (factors influenced PED)
–> Price relative to Y
–> Habit forming goods
–> Availability of substitutes
–> Time
Explain income elasticity of demand
The reactivity of demand to changes in income
- Equation = %△D/%△Y
- Interpretation (+ = normal, - = inferior)
–> Necessity = <1
–> Luxury = >1
–> Inferior = <0
- Use = produce plan, anticipate future D, show effect of recession on growth of D
Explain cross elasticity of demand
The reactivity of a change in demand of one good to a change in price of another
- Equation = %△DA/%△£B
- Interpretation (+ = substitutes, - = complements)
–> Weak sub = <1
–> Strong sub = >1
–> Weak comp = <-1
–> Strong comp = >-1
- Use = marketing strategy, effect of competition
Explain the types of supply
- Joint supply = goods derived from same production process
- Individual supply = supply from one firm
- Market supply = the sum of all production across the marketW
What are the factors shifting supply
- Cost of raw materials
- Tech changes
- Weather/climate
- Economic shocks
- Indirect tax/subsidies
- Number of firms
- Price of substitutes
Explain price elasticity of supply
The reactiveness of supply to a change in price
- Equation = %△S/%△£
- Interpretation (always +)
–> Perfectly elastic = ∞
–> Elastic = >1
–> Unitary = 1
–> Inelastic = <1
–> Perfectly inelastic = 0
- Factors influencing
–> Time
–> Spare capacity
–> Stock levels
–> Substitute availability
–> Ease of entry
What is a market
Where buyers and sellers interact to trade goods and services
What is equilibrium
Efficient allocation of resources where quantity and price are determined by supply and demand
What is disequilibrium
A state in which quantity/price is above or below the market equilibrium leading to excess supply/demand
- Causes = govt intervention, labour market inefficiency, price fixing, imperfect information
Describe interrelated markets
Where a change in one market can affect others markets
- Consumer surplus = difference between price willing to pay and price paid
- Producer surplus = difference between price willing to produce at and price produced at
