HOW PRICES ARE DETERMINED

Demand

The quantity of a good or service that consumers are willing and able to purchase at various prices over a period of time.

Law of Demand

States an inverse relationship between price and quantity demanded; as price decreases, demand increases, and vice versa.

Demand Curve

A graphical representation showing the relationship between price and quantity demanded, typically sloping downward from left to right.

Factors Affecting Demand

Various factors like price of the good, income levels, tastes, prices of related goods, and future expectations can influence demand.

Supply

The quantity of a good or service that producers are willing and able to sell at various prices over a period of time.

Law of Supply

Indicates a direct relationship between price and quantity supplied; as price increases, supply increases, and vice versa.

Supply Curve

A graphical representation illustrating the relationship between price and quantity supplied, usually sloping upward from left to right.

Factors Affecting Supply

Factors such as price of the good, production costs, technology, prices of related goods, number of suppliers, expectations, and government policies can impact supply.

Equilibrium Price

The price at which quantity demanded equals quantity supplied, leading to market equilibrium.

Elasticity

Measures the responsiveness of quantity demanded or supplied to price changes, with Price Elasticity of Demand (PED) and Price Elasticity of Supply (PES) as key concepts.

Price Elasticity of Demand (PED)

Indicates the responsiveness of quantity demanded to price changes, with elastic and inelastic demand based on the magnitude of change.

Price Elasticity of Supply (PES)

Reflects the responsiveness of quantity supplied to price changes, categorized as elastic or inelastic based on the degree of change.

Factors Affecting PED

Include availability of substitutes, necessity vs. luxury goods, time period, and proportion of income, influencing the elasticity of demand.

Factors Affecting PES

Involve time period, availability of resources, flexibility of production, and spare capacity, affecting the elasticity of supply.