price determination in competitive markets

what is a market?

where buyers and sellers interact to exchange goods and services

what does a demand curve show?

the relationship between price and quantity demanded

what causes shifts in the demand curve?

S - substitues

P - population

A - advertisement

F - fashion/trends

I - income

C - complements

formula for PED

change in QD / change in price

formula for income elasticity of demand

change in quantity demanded / change in income

formula for cross elasticity of demand

change in quantity demanded A / change in price B

formula for percentage change

new - old / old

what is PED

how responsive quantity demanded is to a change in price

what is price inelastic demand

demand where QD changes by a smaller proportion than than price

what is price elastic demand

demand where QD changes by a larger proportion than price

what is unitary elasticity

QD does not change at all when price changes

what is perfectly inelastic

QD does not change at all if price changes

what is perfectly elastic

QD falls to zero if price changes

how do you know if something is price inelastic?

PED < 1 = inelastic

how do you know if something is price elastic?

PED > 1 = elastic

what should firms do if a good is price inelastic?

raise prices → to maximise profit

what should firms do if a good is price elastic?

lower prices → to maximise profit

what is an inferior good and how does YED tell us this?

if a good has a negative YED → inferior good

• means when income rises, demand falls

what is a normal good and how does YED tell us this?

positive YED → normal good

• normal necessity → demand rises when income rises but not very much

• normal luxury → demand rises when income rises a lot

what is the value of a normal necessity?

0 → 1

what is the value of a normal luxury?

YED > 1

what is the value of an inferior good?

YED < 0

what is income elasticity?

measures how responsive quantity demanded is to a change in income.

what is cross elasticity

measures how responsive quantity demanded of good A is to a change in the price of good B.