2 - Price detemination in a competitive market

Goods market = selling goods households have effective demand for (demand backed by an ability to pay). In order to have effective demand, households must offer their labour services or other factors (factor markets)

Market demand is the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices. Sum of individual demands. Law of demand = price decrease leads to demnd demand increase. Not always though.

Demand Curves - ceterus paribus

Movement along is when a good's price changes. Other factor = shift in curve.

Conditions (determinants of demand other than the good's price that fixes the position of the demand curve). Substitute and complimentary goods, personal disposable income, tastes and population size.                                        

Normal good = a good for which demand rises as income rises & vice versa.

Inferor good = a good for which demand falls as income rises & vice versa.

Elasticity = the proportionate responsiveness of a second variable to an initial change in the first variable. e.g. 5% increase in price means a 10% decrease in demand. -10/5 = -2.             Elastic (more than 1). Inelastic (less than 1).  Unit elasticity of demand (1)

Three demand elasticities are Price (%change in Qd/ %change in price) Income (%change in Qd/ %change in income) and Cross (%change in Qd of A/ %change in price of B)

Price elasticity of demand measures the extent to which demand for a good changes in response to a change in the price of that good. Substitutability, %of income, necessities/luxuries, width of market, time.

Income elasticity of demand measures the extent to which the demand for a good changes in response to a change in income. Normal (+), Inferior (-)

Cross elasticity of demand measures the extent to which the demand for a good change in response to a change in the price of another good. Complimentary/joint demand = less A due to price of B up. Substitute/competing demand = more of A due to price of B up. Normally both inelastic

Market supply - the quantity of a good/service that all firms plan to sell at a given time

The law of supply - higher prices = more supplied

Curves

Upward sloping curve because of profit maximising objective. More of a good is supplied only if it is profitable, since there would be extra production costs.

Condtions of supply (can cause a shift in the supply curve)

Costs of production (wages, raw materials,energy, borrowing)

Technical progress

Taxes such as VAT, excise duties and the business rate

Subsidies

Price elasticity of supply - measures the exten to which the supply of a good changes in esponse to a change in he price of that good

%changed in quantity supplied/%changed in price

If supply interjects price axis = elastic. Quantity axis = inelastic heading towards unitary

Factors 

Length of production period, spare capacity, ease of acculumating stocks , ease of switching between altenative methods of production, number of firms in market, ease of entering maket,

Time - Market period supply - sudden demand increase = price rise as there is excess demand. Short run supply - higher price = higher profits. More incentive to increase output using variable factors of production. Price falls. Long run - may increase factors of production which are variable in the long run. output rises and price falls

Elastic - larger affect on quantity.  Inelastic - larger affect on price