3. Price determination in a competitive market

the determinants of demand, price/income/cross elasticities of demand, supply of goods and services, price elasticity of supply, the determination of equilibrium market prices and the interrelationship between markets

Market

a voluntary meeting of buyers and sellers with exchange taking place

demand

the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period

supply

the quantity of a good or service that producers are willing and able to sell at given prices in a given period of time

competitive markets

markets in which the large number of buyers and sellers possess good market information and can easily enter or leave the market

ruling market price (equilibrium price)

the price at which planned demand equals planned supply

market demand

the quantity of a good or service that all consumers in a market are willing and able to buy at different market prices

individual demand

the quantity of a good or service that a particular consumer or individual is willing and able to buy at different market prices

substitute goods

alternative goods that could be used for the same purpose

condition of demand

a determinant of demand other than the goods own price that fixes the position of the demand curve

complementary goods

when two goods are complements they experience joint demand

increase in demand

a rightward shift of the demand curve

decrease in demand

a leftward shift of the demand curve

normal good

a good for which demand increases as income rises and demand decreases as income falls

inferior good

a good for which demand decreases as income rises and demand increases as income falls

elasticity

the proportionate responsiveness of a seconds variable to an initial change in the first variable

price elasticity of demand

measures the extent to which the demand for a good changes in response to a change in the price of the good

short run

the time period in which at least one factor of production is fixed and cannot be varied

long run

the time period in which no factors of production are fixed and in which all factors if production can be varied

income elasticity of demand

measures the extent to which the demand for a good changes in response to a change in income

cross-elasticity of demand

measures the extent to which the demand for a good changes in response to a change in the price of another good

market supply

the quantity of a good or service that all the firms in a market plan to sell at given prices in a given period of time

profit

the difference between total sales revenue and total costs of production

Total revenue

all the money received by a firm from selling its total output

condition of supply

a determinant of supply other than the goods own price that fixes the position of the supply curve

increase in supply

a rightward shift of the supply curve

decrease in supply

a leftward shift of the supply curve

price elasticity of supply

measures the extent to which the supply of a good changes in response to a change in the price of the good

excess supply

when firms wish to sell more than consumers wish to buy with the price above the equilibrium price

excess demand

when consumers wish to buy more than firms wish to sell with the price below the equilibrium price

joint supply

when one good is produced another good is also produced from the same raw materials

composite demand

demand for a good which has more than one use therefore competing supply

derived demand

demand for a good or factor of production wanted not for its own sake but as a consequence of demand for something else