Price determination in a competitive market

define demand

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

What does a demand curve show?

he relationship between the price of a good or service and the quantity demanded.

what causes shifts in the demand curve

PIRATES

Population - larger the population, the higher the demand
income - more disposable income, they are able to afford more goods, so demand increases.
related goods - substitutes or complements.
advertising - increase consumer loyalty to the good and increase demand.
tastes and fashion - demand curve will also shift if consumer tastes change
expectations -
seasons - Demand changes according to the season eg summer and ice cream

ped formula

% change in quantity demanded / % change in price

interpretations of PED values

PED > 1: Elastic demand

PED < 1: Inelastic demand

PED = 1: Unitary elasticity.

How does price elasticity of demand affect total revenue?

Elastic demand: Lowering price increases total revenue.

Inelastic demand: Raising price increases total revenue.

YED formula

% change in quantity demanded / % change in income

How does YED classify goods?

Normal goods: Positive YED (demand rises with income).

Inferior goods: Negative YED (demand falls as income rises).

XED formula

% change in quantity demanded of good X / % change in price of good Y

How does XED classify relationships between goods?

Substitutes: Positive XED (demand for one rises as the price of the other rises).

Complements: Negative XED (demand for one falls as the price of the other rises).

What factors influence elasticities of demand?

Availability of substitutes.

Necessity versus luxury.

Proportion of income spent.

Time period considered.

What does a supply curve show?

The relationship between the price of a good and the quantity supplied.

Why do higher prices lead to increased supply?

Higher prices increase the potential for profit, incentivizing producers to expand production.

What causes shifts in the supply curve?

PINTSWC

productivity - Higher productivity causes an outward shift
indirect taxes - Inward shift
number of firms - more firms there are, the larger the supply.
technology - More advanced the technology causes an outward shift
subsidies - outward shift
weather - (agricultural produce)
cost of production - If costs of production fall, the firm can afford to
supply more. If costs rise, such as with higher wages, there will be an inward
shift in supply.

PES formula

% change in quantity supplied / % change in price

What factors influence PES?

time - short run, supply is more price inelastic, because producers cannot quickly increase supply.

spare capacity

Barriers to entry to the market - Higher barriers means supply is more price inelastic

What determines equilibrium price in a market?

The interaction of demand and supply where quantity demanded equals quantity supplied.

What is disequilibrium?

where the market price is not at equilibrium, leading to excess demand or excess supply

How do excess demand and excess supply affect price?

Excess demand: Prices rise as buyers compete for limited goods.

Excess supply: Prices fall as sellers try to clear surplus stock.

Under perfect competition, what does the supply curve represent?

The marginal cost curve of production.

How are demand and supply diagrams used to analyze changes in equilibrium?

Diagrams show shifts in curves due to changes in factors affecting demand or supply, allowing for visualization of new equilibrium points.

What are the assumptions of the supply and demand model?

Perfect competition.

Price determination in a competitive market

No externalities.

How can changes in one market affect other markets?

changes in price, demand, or supply in one market can spill over into related markets through interdependencies.

What is joint demand?

When two goods are demanded together because they complement each other, e.g., cars and fuel.

What is competitive demand?

When goods are substitutes and compete for consumer demand, e.g., tea and coffee.

What is composite demand?

When a good is demanded for multiple uses,

What is derived demand?

What is joint supply?