price determinations in a competitive economy

PED

Measure of the responsiveness of qantity demanded given a change in price

Why is PED always negative

Law of demand

Price elastic

More than 1 - at any given change in prce the change in quantity demanded is proportionatly larger

Price inelastic

Less than 1 - at any given change in quantity demanded the change in price is proportionatly larger

Perfectly price elastic

Infinite- when price rises, leds to an infinitly larger change in quantity demanded

Perfectly price inelastic

0- regardless of price change, quantity demanded wont change at all

Unitary price elastic

1- percentage change of price is equal to percent change of quantity demanded

What effects the elasticity or inelasticity

Substitutes

Percentage of income

Luxury or neccessity

Addictivness

Time period

YED

Measure of the responsiveness of quantity demanded given a change in income

Normal good

Positive number- positive relationship between income and quantity demanded

Inferior good

Negative number - invese relationship between income and quantity demanded

Normal luxury

More than one- income elastic

Normal neccessity

Less than 1 - income inelastic

Inferior goods on a graph

Downward slopping

Normal goodson a graph

Upwards sloping

XED cross elasticity of demand

Measure of the responsiveness of quantity demanded of good A given a change in price in good B

Substitutes

Positive number- goods in competitive demand as one goes up he other goes up

Compliments

Negative number- goods in joint demand as one goes up the other goes down

If demand between goods is elastic

Strongly related

If demand between goods is inelastic

Weakly related

Substitutes on a graph

Upward slopping

Compliments on a graph

Downward slopping

Weaken the strength of substitutes

Unique features

No close alternatives

Inelastic preference- consumer loyalty

Quality perception advantage

Increase strenght of compliments

Combined use rises

Low standalone value

Overlapping demand

Strong linkage in consumption

Enhanced joint utility

PES price elasticity of supply

Measure of the responsiveness of quantity supplied given a change in price

Why is PES always positve

Law of supply

Why is it more elastic or inelastic

Production log

Stocks

Spare capacity

Ssubstitutability of FoP’s

Time

Market equilibrium

Where demand is equal to supply in a market

Market disequilibrium

Where deman is not equal to supply in a market

How do you control excess demand or supply

Price mechanism

Price mechanism

Allocate

Ration

Signal

Incentivise

Supply

The quantity of goods/services producers are willing and able to produce at a given prie in a time period

Law of supply

A direct relationship between price and quantity supplied

Why do producers supply more when price increases

Profit motive

Factors affecting supply and price

Productivity

Indirect tax

Number of firms

Technology

Subsidy

Weather

Cost of production

Joint demand

Compliment goods - goods that are usualy bought together

Derived demand

When demand for a good/service comes from something else

Composite demand

2 goods require the same input to make them e.g. cheese and milk require butter

Joint supply

Increase production of 1 good/service will increase the supply o another good/service