Competitive Markets

PED

A measure of how the quantity demanded changes in response to change in its price

Formula of a PED

Elastic PED

PED>1

Inelastic PED

0<PED<1

Unit elasticity of demand

PED=+-1

Unit Elasticity of demand means

When change in quantity demanded = change in price

Elastic PED diagram

Inelastic PED Diagram

Unit Elasticity of D Diagram

YED means

Measure of how much quantity demanded of a good changes in response to change in price

YED

YED Elastic

YED>1

YED Inelastic

YED<1

YED perfectly inelastic

YED=0

Elastic YED Diagram

Inelastic YED Diagram

Perfectly Inelastic YED Diagram

XED means

A measure of how the quantity demanded of one good responds to a change in the price of another good

XED Formula

The XED for substitute goods is

Positive

The XED for complementary goods is

Negative

Factors, influencing PED

Number of substitutes, type of good, percentage of income spent on good, time

Total Revenue/PED diagram

When does firm maximize its profit?

At PED=+-1/Unit elastic

If a good’s PED is elastic, then

If a good’s PED is inelastic

When XED=0, the goods are

Unrelated

Factors, influencing Supply

Changes to the costs of production, improvements in technology, Changes to the productivity of factors of production, indirect taxes and subsidies, Changes to the prices of other goods, number of suppliers

Joint supply means when

Production of one good or service, involves the production of another

Competitive supply means

when two alternative goods or services can be produced using the same number of factors of production. Potatoes and carrots, for instance

PES means

measure of how the quantity supplied of a good changes in response to change in its price.

PES Formula

Elastic PES

PES>1

Inelastic PES

0<PES<1

Unit elasticity of supply

PES=+1

Elastic PES Diagram

Inelastic PES Diagram

Unit Elasticity of Supply Diagram

The best PES for firms is the and why

Elastic PES, since it lets firms react to changes in prices very quickly (in case of inelastic PES, it takes firms too much time to start producing more and selling more)

How can firms increase their elasticity

Impose new technologies, methods, have skillfull labour, having spare production capacity (start producing a lot, without increasing costs)

What type of supply dominates in the short run

Inelastic supply

Why is supply inelastic in the short run

Firms cannot produce significantly a lot in the beginning, since at least of their factors of production is fixed.

What type of Supply is in the long run and why

Elastic Supply, since all factors of production in the long run are variable, so the firm can produce more in the long run, firms have longer to react to changes in price and demand

What is the reason for large distinctions in time for supply to change across different industries

Whether the industry is capital-intensive or not

Factors, affecting PES

Periods of unemployment provide rather elastic supply, perishable goods have inelastic supply, firms with high stock level usually have elastic supply, firms with mobile factors of production have higher elasticity of supply

In inelastic PED or PES, curve shifts have higher impact on

The price

In elastic PED or PES, curve shifts have higher impact on

The quantity demanded/supplied

Under what conditions do competitive markets exist

What is the price mechanism

The price mechanism has three main functions

Consumer surplus

Consumer Surplus, Producer Surplus

Supply decreased, price increased, both surpluses decreased

Demand decreased, price decreased, both surpluses decreased

Subsidies and Indirect taxes lead up to

shifts in Supply curve

The main task of a subsidy

Increase demand

The main task of an indirect tax

Decrease demand

The relative amounts of benefit gained by producers and consumers from both interventions are dependent on

the price elasticity of demand and supply

The rather inelastic demand provides more gain to

The consumer

The rather elastic demand provides more gain to

The producer

Inelastic demand, more gain to the consumer

Elastic demand, more gain to the producer

The indirect taxes

Make the Supply curve shift to the left

The rather inelastic demand is, the more the

consumer suffers

The more elastic demand is, the more the

Producer suffers

Inelastic demand, consumer pays more

Elastic demand, producer pays more