Price Determination

Full Flashcards set for section Price Determination AQA A-Level Economics

Demand is

The amount society is willing and able to buy at a set price in a given time period

Determinants of Demand

• Change in consumer income

• Change in tastes and preferences

• Change in the price of substitutes

• Change in the price of compliments

• Changes in interest rates

• Changes in consumer confidence

• Changes in population size

Changes in price and changes in quantity demanded is shown as

A movement along the demand/supply curve

A change in any factor except price is shown as

A shift in the demand/supply curve

Normal Goods

• Where more is demanded as income rises

• Positive YED

  • Necessities<1

  • Luxuries>1

Inferior goods

• Cheaper quality substitutes that people stop buying as income rises

  • Negative YED

Supply is

The amount of a good or service that producers are willing and able to sell at given price in a given time period

As price rises

Quantity Supplied increases

As price falls

Quantity Supplied decreases

Determinants of Supply

• Changes in production costs

• Government taxes and subsidies

• Climatic Conditions

• Changes in production technologies

• Changes in the number of producers in the market

• Changes in the objectives of the suppliers

• Changes in the price of substitutes

Market Equilibrium is

Where demand = supply

Complementary Goods

• Are those often brought together(e.g. Cars and fuel)

  • Are in joint demand

  • Have a negative XED

Substitutes

• Act as competing alternative products

• Demand depends on the number and closeness of available substitutes

  • Positive XED

  • The closer the substitutes the higher the XED

Composite Demand

• Occurs when there are competing uses for the same good or service (e.g. land)

Derived Demand

• Occurs as a result of demand for another good or service (e.g metal for tins of tinned tomatoes)

• All finished products create derived demand

• Increase in demand for a product will create derived demand for a related good or service

Joint Supply

• Occurs when production creates a by-product that can also be supplied

• An increase in the supply of one increases the supply of the other - supply curves shift left

PED Formulae

% change in quantity demand

---

% change in price

PED Determinants

• Number of close substitutes for the good and the uniqueness of the good in the market

• Degree of necessity of consumption

• The % of a consumer’s income allocated to spending on the good

• Time period allowed following a price change

• Whether demand causes habitual consumption

• Peak/Off Peak Demand

• The breadth of definition of a good or service

PES Formulae

% change in quantity supplied

---

% change in price

Determinants PES

• Spare Capacity

  • When there is spare capacity, businesses can expand output easily to meet rising demand without upward pressure on costs, so PES is elastic

• Levels of Stock

  • Low levels of stock makes supply inelastic in the short run but when stocks can be released onto the market supply is elastic

• Time period - short run inelastic…

• Time required for a production

  • The longer it takes to produce a good the less responsive a firm is changes in price

• Artificial limits on supply

  • Patents that limit which firms can supply a product will make supply more inelastic

YED Formulae

% change in quantity demand

---

% change in income

YED Relevance

• Standard of living

  • Wealthier countries have consumers with higher disposable incomes

  • So have greater spending power and buy luxury goods and services

  • Firms produce superior products

• The economic cycle

  • Shows the economy during recessions and boom to provide information

XED Formulae

% change in quantity demand of x

---

% change in price of y

Determine XED

• Substitute = Positive

• Complement = Negative

• No relationship = 0

XED Relevance

• Substitute

  • Firms will try to differentiate their products

• Complements

  • Firms will produce a range of complements to increase total revenue