Unit 3:Price determination in a competitive market

What does a demand curve show?

A demand curve shows the relationship between price and quantity demanded

What causes a shift in the demand curve?

-Changes in income

-Consumer tastes

-Prices of substitutes or complements

-Population change

-Advertising

What is price elasticity of demand (PED)?

PED measures responsiveness of demand to a change in price

What is income elasticity of demand (YED)?

YED measures responsiveness of demand to a change in income

What is cross elasticity of demand (XED)?

XED measures responsiveness of demand for one good to a change in the price of another

What is the formula for PED?

PED = % change in quantity demanded ÷ % change in price

What is the formula for YED?

YED = % change in quantity demanded ÷ % change in income

What is the formula for XED?

XED = % change in quantity demanded of good A ÷ % change in price of good B

What does a positive YED indicate?

A normal good

What does a negative YED indicate?

An inferior good

What does a positive XED indicate?

Substitute goods

What does a negative XED indicate?

Complementary goods

How does PED affect total revenue?

-Elastic demand: price increase reduces total revenue

-Inelastic demand: price increase raises total revenue

What factors influence PED?

-Availability of substitutes

-Time

-Necessity vs luxury

-Habit-forming

-Proportion of income

What factors influence YED?

-Income level

-Type of good

-Necessity or luxury

What factors influence XED?

-Strength of relationship

-Substitutability or complementarity

What does a supply curve show?

A supply curve shows the relationship between price and quantity supplied

Why do higher prices increase supply?

Higher prices imply higher profits, incentivising producers to supply more

What causes a shift in the supply curve?

-Changes in production costs

-Technology

-Taxes and subsidies

-Weather

-Number of sellers

What is the shape of the supply curve under perfect competition?

The marginal cost curve

What is PES?

PES measures responsiveness of quantity supplied to a change in price

What is the formula for PES?

PES = % change in quantity supplied ÷ % change in price

What factors influence PES?

-Spare capacity

-Stock levels

-Production time

-Time period

-Mobility of factors

What determines equilibrium market prices?

The interaction of demand and supply

What is market disequilibrium?

Disequilibrium is when demand does not equal supply

What causes excess demand?

Quantity demanded exceeds quantity supplied

What causes excess supply?

Quantity supplied exceeds quantity demanded

How does excess demand affect prices?

Excess demand causes prices to rise

How does excess supply affect prices?

Excess supply causes prices to fall

What is joint demand?

Joint demand is when goods are used together e.g. printers and ink

What is competitive demand?

Competitive demand is when goods are substitutes e.g. butter and margarine

What is composite demand?

Composite demand is when one good is demanded for multiple uses e.g. milk

What is derived demand?

Derived demand is when demand for one good is linked to another e.g. labour for products

What is joint supply?

Joint supply is when producing one good also produces another e.g. beef and leather