Price determination in competitive market Flashcards
(27 cards)
Demand
amount of good or service consumers are willing and able to buy at any given price over period of time
Factors that influence demand
Price(contract or extend)
Income
Wealth
Price of sub
Price of complement
Individual preference
Law of demand
As price rises demand falls
Price elasticity of demand
responsiveness of quantity demanded to a change in price
%change in quantity demanded
———-————————————
%change in price
always negative
Price elastic demand
small change in price leads to proportionally large change in demand
value between -1 and ♾️
Price inelastic demand
large change in price leads to proportionally small change in demand
value between 0 and -1
Factors influencing PED
degree of necessity-(inelastic if necessary)
habit forming-(inelastic)
subs-(elastic if close subs)
income-(high-inelastic)
time-(short run -inelastic )
% of income spent on good -(high-elastic)
Why do firms like to know PED
so they can assess impact of price changes on revenue
Income elasticity of demand
responsiveness of demand to a change of income
% change in demand
———————————
% change in incme
Income elasticity of demand on normal inferior and superior goods
Normal goods-positive YED
Inferior goods- negative YED
Superior goods-high positive YED
Factors influencing YED
Nature of product
Individual preferences
Income levels and distribution of income
Time (more elastic in long run)
Cross elasticity of demand
Responsiveness of demand to a change in price of another product
% change in demand of product X
—————————————————
% change in price of product y
XED with subs and complements
Strong complements- between -1 and ♾️
Weak complements- between 0 and -1
Weak subs- between 0 and 1
Strong subs- between 1 and ♾️
Factors influencing XED
Strength of subs and complements
Time- (low until time to find other subs or complements)
Business significance of XED
helps pricing strategy
more resources in marketing
firms may sell complements as packages
firms may merge
Supply
amount of goods and services producers are willing and able to offer for sale at any given price over a period of time
Law of supply
as price rises supply rises
Factors influencing supply
Price (movement)
Price of other goods supplier could produce
expectations of future prices
labour costs
costs of production
indirect taxes
subsidies
legislation
Price elasticity of supply
responsiveness of supply to a change in price
% change in supply
—————————
% change in price
Factors influencing PES
Time- elastic in long run
Spare capacity-more elastic if high
Ease of acquiring new resources—more elastic if easier
Ease of switching production-elastic if easier
Length of production process- inelastic if longer
Level of stock-elastic if higher
Number of firms-less firms more inelastic
Difference between equilibrium and disequilibrium
Equilibrium—when supply=demand
Disequilibrium—when supply≠demand
Excess supply and demand
Excess supply—supply>demand
—suppliers cut pride to sell unsold goods till equilibrium
Excess demand—demand>supply
—suppliers raise price to equilibrium as they are motivated by profit
Joint demand
when two or more goods are used together (complements
Joint supply
When supply of one good leads to production of another good
beef and leather
