Price Determination in a Competitive Market
- Created by: ekenny5
- Created on: 02-05-21 17:03
View mindmap
- Price determination in a competitive market
- determinants of demand
- higher price lowers demand
- Population - ^ pop ^demand - could be due to inward migration
- Advertising and Marketing - more ads may ^ demand
- Substitute goods- the closer the substitute, the more effect. If p of substitute lowers, demand will fall
- Income of consumers - ^real income ^ability to purchase so ^demand
- Fashion - social and economic factors eg superfoods becoming trendy
- Interest rates/income tax - lower IR encourage spending so ^demand. ^income tax lowers disposable income so decreases demand
- Compliment goods eg cereal and milk. If price of one ^, demand for others may decrease
- PINTS WC
- effective demand is demand backed up by willingness and ability to pay
- derived demand - demand for a factor of production used to produce another good or service
- composite demand - when goods have more than one use
- Elasticities of Demand
- elasticity is the proportionate responsiveness of a second variable to an initial change
- PED - price elasticity of demand
- PED = 0 - perfectly inelastic
- PED < 1 - inelastic
- PED = 1 unit elastic
- PED > 1 elastic
- change in QD/ %change in P
- Factors affecting PED - no of substitutes - price in relation to income - cost of substituting - brand loyalty - degree of neccesity
- YED - income
- % change QD/ % change real income
- normal - +ve YED. ^D when Y^
- Necessities - YED >0 < 1
- Inferior - -ve YED. low income lowers demand
- XED - cross
- %change of QD good x / %change P of good y
- substitutes are in competitive demand - ^ p for x ^ d for y
- +ve XED
- Compliments are products in joint demand. decreased d for x leads to ^ d for y
- -ve XED
- close substitutes are strongly +ve.
- close compliments are strongly -ve
- Determinants of Supply
- willingness and ability to supply to the market at a given price in a given time period
- as price ^ supply expands
- increased price increases profit motive for firms, encourages new entrants to the market
- Productivity - ^ productivity, shift outwards
- Indirect taxes cause an inward shift (eg VAT)
- Number of firms (outward shift)
- Technological advancement for production - outward shift
- Subsidies cause outward shift (lower COP)
- Weather conditions eg in agriculture - poor conditions cause inward shift
- Costs of production - if decreased COP, more supplied at each price
- Joint Supply - change in supply of one good changes supply of another. eg wheat and straw
- PES - price elasticity of supply
- %change QS/ % change price
- if elastic, producers can increase output without a rise in price or time delay
- PES > 1 - elastic
- PES < 1 - inelastic
- PES = 0 - perfectly inelastic
- PES = infinity - perfectly elastic
- Barriers to entry
- Raw materials - availability
- Inventory - held stock means more responsive
- time
- Spare capacity
- BRITS
- Equilibrium
- balance between market demand and supply
- equilibrium where demand = supply
- the ruling market price is where supply = demand
- at disequilibrium, d>s or s>d
- excess supply is more supply than demand - glut
- excess demand is more demand than supply - shortage
- determinants of demand
Comments
No comments have yet been made