How prices are determined

What is demand?

The quantity of a good or service that consumers are willing and able to buy at different prices.

What is the law of demand?

As price falls, quantity demanded increases, and vice versa.

What are the main factors that affect demand?

Price, income, tastes and preferences, population, price of substitutes and complements.

What is a demand curve?

A graph showing the relationship between price and quantity demanded.

Why does the demand curve slope downwards?

Because lower prices lead to higher demand.

What is supply?

The quantity of a good or service that producers are willing and able to sell at different prices.

What is the law of supply?

As price rises, quantity supplied increases, and vice versa.

What are the main factors that affect supply?

Price, production costs, technology, number of firms, and external shocks.

What is a supply curve?

A graph showing the relationship between price and quantity supplied.

Why does the supply curve slope upwards?

Because higher prices incentivise more production.

What is the equilibrium price?

The price at which quantity demanded equals quantity supplied.

What happens if the price is above equilibrium?

There is excess supply (a surplus).

What happens if the price is below equilibrium?

There is excess demand (a shortage).

How is equilibrium price determined?

By the interaction of supply and demand in a market.

What are intermarket relationships?

How a change in one market affects other related markets.

What is an example of an intermarket relationship?

If the price of petrol rises, demand for fuel-efficient cars may increase.

What is price elasticity of demand (PED)?

A measure of how much quantity demanded changes in response to a change in price.

What is the formula for PED?

% change in quantity demanded ÷ % change in price.

What does it mean if demand is price elastic?

Demand changes by a larger percentage than the price (PED > 1).

What does it mean if demand is price inelastic?

Demand changes by a smaller percentage than the price (PED < 1).

What are the main factors affecting PED?

Availability of substitutes, necessity vs luxury, proportion of income, time.

What is price elasticity of supply (PES)?

A measure of how much quantity supplied changes in response to a change in price.

What is the formula for PES?

% change in quantity supplied ÷ % change in price.

What does it mean if supply is price elastic?

Supply responds significantly to a price change (PES > 1).

What does it mean if supply is price inelastic?

Supply responds only slightly to a price change (PES < 1).

What are the main factors affecting PES?

Availability of resources, production time, spare capacity, and ease of storage.