Price Determination in Competitive markets Flashcards
(25 cards)
What are the factors affecting demand
Pasific
- Population
- advertising
- substitutes
- income
- fashion
- interest rates
- complements
What is Diminishing Marginal Utility
Foe every extra unit of goods that are consumed the marginal utility (benefit derived) from that good decreases
What is the price elasticity of demand equation
%∆Q/%∆p - responsive ness of a change in demand to a change in price
PED value for elastic good
> 1
PED value for inelastic good
<1
what is the value of PED for
- unitary elastic
- perfectly inelastic
- perfectly elastic
1
0
infinity
factors affecting Price elasticity
never shoot a parrot
- Necessity
- Substitutes
- Addictiveness
- Proportion of income spent
what is the equation for income elasticity of demand
%∆Q/%∆y
what is an:
- Inferior
- Normal
- Luxury good
and there YED values
- inferior - demand falls as incomes rise
YED<0 - Normal food - Demand increases as incomes rise
YED>0 - Luxury good - Demand increase is bigger than the initial increase in income
YED>1
what is the equation for cross elasticity of demand
XED = %∆Q of X/%∆P of Y
what is a complement good and what is its XED value
Compliment good - if the price of one falls the quantity demanded of both increases
XED<0
what is a substitute good
- what is its XED value
- What is special about the demand curve
- Substitute goods can replace other goods
- XED>0
- this means the demand curve is upward sloping due to the positive gradient
What is XED value for unrelated goods
0
why are firms interested in XED
it allows them to see the extent of there competition
What are the factors affecting Supply
PINTSWC
productivity of labor
Indirect taxes
number of firms
technology
subsidy
weather
costs of production
what are three factors affecting PES
- Unused/mobility/availability of FOP
- total stock
- Time scale
what is:
- Derived demand
- Composite Demand
- Joint Demand
- Joint supply
- Derived demand - when demand for a good or service is derived from the demand for another good or service
- Composite demand - When the good demanded has more than one use
- Joint Demand - when goods are bought together
- Joint supply - Increase of supply of 1 good will cause an increase in supply of another good
definition of market equilibrium
market equilibrium is when supply directly follows consumer demand meaning all social surpluss is maximised therefore leading to allocative efficiancy and solving the basic economics problem as the distribution of resources is optimized therefore leading to FOP being used in there most effective area
what is the invisiible hand mechanism
Adam smith:
if there is disequilibrium then in a competitive market there is no need to intervene as it is short run
what are the functions of price
ARSI
allocate scarce resources
rationing function
signaling function
incentive to increase output
how do the functions of price determine quantity when there is a shift of demand
higher prices:
- Signal there is need for more resources/output
- Incentivize firms to increase output to make more profit (movement along supply) therefore increasing price
- rationing function of price (movement up demand curve
- Allocative efficiency is achieved
how do the functions of price determine quantity when the is a shift of supply
- lower prices:
signal there is overproduction in the market - incentivizes firms to cut output (liquidate assets)
- Rations scarce resources by encouraging more demand
- allocative efficiency is achieved
why is the point Q* allocatively efficient
- resources perfectly follow consumer demand
- maximization of net social surplus
- maximization of net social benefit
benefits of a free market
- no surplus/shortage
- competitive (high choice low price high quantity efficient)
- freedom and liberty
- no government failure
