Unit 2 - Price determination in a competitive market

Factors that shift the demand curve

• Population

• Income

• Related goods

• Advertising

• Tastes

• Expectations

• Seasons

Diminishing marginal utility

For every one unit of good that is consumed the marginal utility decreases.

Price elasticity formula

%Change in Quantity Demanded ÷ %Change in Price

Price elasticity definition

The responsiveness of quantity demanded to a change in price

• Inelastic PeD

• Elastic PeD

• Unitary PeD

• Inelastic PeD < 1

• Elastic PeD > 1

• Unitary PeD = 1

• Perfectly Inelastic PeD

• Perfectly Elastic PeD

• Perfectly Inelastic PeD = 0

• Perfectly Elastic PeD = Infinite

Factors Influencing PeD

• Necessity

• Substitutes

• Addictiveness / Habits

• Proportion of income

• Durability of the good

• Peak and off-peak demand

Income Elasticity Formula

%Change in quantity demanded / %Change in income

• Luxury good YeD

• Normal good YeD

• Inferior good YeD

• YeD > 1

• YeD > 0

• YeD < 0

Cross elasticity of demand formula

%ΔQD of X ÷ %ΔP of Y

Compliment good

Negative XED. Usually brought together

Substitute good

Positive XED. Brought instead of another good

Unrelated good

XED = 0.

Factors that shift the supply curve

• Productivity

• Indirect Tax

• Necessity

• Technology

• Subsidies

• Weather

• Costs of production

Price elasticity of supply formula

%ΔQS ÷ %ΔP

Elastic PeS

Pes > 1

Inelastic PeS

PeS < 1

Perfectly elastic PeS

PeS = Infinity

Perfectly inelastic PeS

PeS = 0

Factors influencing PeS

• Production

• Spare capacity

• Stock levels

• Substitutability of factors of production

• Time

• (Barriers to entry)

Derived demand

The demand for one good is related to the demand of another good

Composite demand

The good demanded has more than one use

Joint demand

When goods are brought together.

Joint supply

Increasing the supply of one goods causes an increase or decrease in supply of another good