Topic 3 - Price Determination In Competitive Markets Flashcards
(16 cards)
What is the definition of demand?
Demand is the quantity of a good that consumers are willing to pay for at a given price in a given time period
Factors of demand:
Population change - larger population = larger chance of people wanting to buy your good.
Advertising - the better advertising ur product has, the more people should be willing to buy it.
Increase in average income - The more income the population has the more people will be willing to buy your product (assuming it is a normal good)
Substitutes pricing - If substitute prices are really high then people will be more willing to pay for your good instead.
Trends - the more “in fashion” a good or service is, the more people will be willing to buy it.
Complementary goods price - if a completmentary goods price drops then people will be more inclined to buy the good.
State the definitions of normal and inferior goods
+ example
Normal good - a higher quality good which is more in demand by people with higher incomes.
Inferior good - a lower quality good that is more in demand by people with lower incomes.
(When disposable income of an individual increases, the demand for normal goods increase and the demand for inferior goods decrease)
Example of a normal and inferior good:
Normal - High quality, organic ketchup using tomatoes from Souther Italy
Inferior - Radioactive Ketchup found inside Chicken World Malden Manor.
What is a giffen good
A good for which a price decrease also leads to a demand decrease.
An example could be a vintage car or vintage painting.
How do you find PED
% change in Quantity demanded
Price elasticity of demand = ——————————————
% change in price of product
How do you find YED
% change in quantity demanded
Income elasticity of demand = —————————————
% change in income
How do you find XED?
. % change in quantity demanded of good A
Cross elasticity = ————————————————————
of demand. % change in price of good B
What does it mean when a good is price elastic vs price inelastic?
Price elastic - Increase in price leads to decrease in demand
- Shoes, shirts, phones, etc.
Price inelastic - Increase/decrease in price doesn’t change the demand (or at a very little scale)
- Petrol, Ciggarettes, etc.
Explain the price elasticities of the following types of goods:
- Normal goods
- Inferior goods
- Luxury goods
- Necessities
- Normal and inferior goods are both elastic since their price determines their demand
- In many circumstances, luxury goods can be price inelastic if there are not substitutes
- Necessities tend to be slightly price inelastic since people will always need to buy them anyways.
Explain what it means when:
YED is positive
- 0 < YED < 1
- 1 < YED
YED is negative
when YED is larger than 1, this is a Normal Luxury good
when YED is larger than 0 but less than 1, This is a Normal necessity
When YED is negative, this is an Inferior good.
Which FActors affect the price elasticity of demand
(SPLAT)
Substitutes - If there are many subs then there is more likely to be more of an impact on demand when price is increased.
Percentage of income - an increase of price for a car by 10% is much worse than an increase of price of an apple by 10% since it takes up less of our income.
Luxury/necessity - a necessity will always need to be bought no matter the price
Addictive - an addictive product is more likely to be bought without price being a factor of decision
Time period - demand is more elastic in the long run because it takes time for the response to change the demand.
What is price elasticity of supply
- its formula
- what it is
% change in quantity supplied
Price elasticity of supply = ———————————————
% change in price
- price elasticity of supply measures the responsiveness of the amount a producer supplies in response to a change in the price of the product.
What is market equilibirum
The point where, in a free market, the market matches the demand (the two curves cross)
How does the price mechanism allocate scarce resources?
When there is excess supply or demand price mechanisms work by changing market prices in order to match the quantities of supply and demand.
Examples of products that are supply inelastic/elastic:
- elastic: baked beans - small and quick + easy to manufacture
- inelastic: nuclear power plant - takes very long time to respond/tickets at a stadium (cannot produce more tickets than the maximum capacity of stadium unles they rebuild which will take a long time.)
Explains the difference between joint/competitive demand and composite
Joint or competitive demands shows the relationship between two substitutes for the same good whilst a composite demand shows the relationship of demand between two complementary products.
