How prices are determined

What is demand for a good?

The quantity of a good that consumers are willing and able to buy at a given price.

What is excess supply?

When the quantity supplied of a good exceeds the quantity demanded of a good at a given price.

What is a complementary good?

A good that is frequently purchased alongside another good - they are consumed together.

What is a substitute good?

A good that can be purchased in replacement of another good - they are very similar and have the same purpose.

They are interchangeable.

What is equilibrium price?

The price where the quantity demanded and the quantity supplied are equal.

What is revenue?

The total amount of money a business receives from selling its goods and/or services.

What is a shift in the demand curve?

Due to non-price factors affecting demand and cause the entire curve to shift to the right or left.

e.g. population, advertising, substitutes.

What is a movement along the demand curve?

Due to price factors as it changes. If price increases, demand decreases.

Give 3 factors that would cause demand to shift to the right.

• Higher population

• Increased spending on advertising

• Less availability of substitutes.

Give 2 factors that would shift a supply curve to the right

• Lower costs of production

• Increased price of the good.

What is the formula for calculation price elasticities?

% change in quantity / % change in price

Give 3 factors that will influence the value of price elasticity of demand

• If a good is a need or want.

• Availability of substitutes

• Price of good - if a low proportion of income is spent on product consumers are less sensitive to a price change

What is price elastic demand?

When demand is very responsive to a change in price.

If price increases, quantity demanded decreases greatly.

What is price inelastic demand?

When demand is not very responsive to a change in price.

If price increases, demand won’t change very much.

What is price elastic supply?

When percentage change in quantity supplied is greater than the percentage change in price.

Give me 2 implications for a producer if the demand for their product is price inelastic

• An increase in price will likely lead to a fall in revenue.

• An increase in price of a substitute will lead to a fall in demand.

Give me 2 implications for a producer if the supply for their product is price inelastic

• An increase in cost of production will lead to a fall in profits.

• May require the producer to have medium and long term plans if output is anticipated to increase.

Give 3 examples of goods with price inelastic demand

• Bread

• Water

• Cigarettes.

What value is price inelastic?

Less than one

How is price elasticity of demand written?

Price elasticity of demand is usually negative, but price elasticity of supply is usually positive.