Determination of prices in a competitive market

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  • Created by: Joe Hicks
  • Created on: 08-06-15 15:45

Demand determining price

Demand- The quantity that buyers are willing to buy at a given price at a given time.

Effective demand- When the consumer must be willing and able to buy the good or service.

Consumers are rational so they buy less when price increases and because they are rational, they buy more when price decreases. 

Movements along the demand curve:

Contraction- The fall in quantity demanded due to a rise in price.

Extension- The increase in quantity demanded due to a fall in a price. 

Movement of the demand curve:

Leftshift- Decrease in demand at same price

Rightshift- Increase in demand at same price

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Demand determining price

Factors that cause demand curve to shift:

Population- Increase in population causes increase in demand.

Advertising- Good advertising campaign can make people aware of companies and demand more.

Substitutes- Price of one falls, the demand for other companies product falls.

Income- If average income falls or rises, demand will chang with this.

Fashion and trends- Depending on what's cool, people will demand goods.

Interest rates- If they rise, people will buy less because it is expensive to borrow. Vice Versa.

Complimentary goods- If one falls in price, demand will rise for other good. Vice Versa.

Inferior goods- Goods which demand falls when income rises. Such as bus journeys as higher average incomes means more people can afford a car.

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How does demand affect price in a competitive mark

Demand affects price within a competitive market because if any of the factors on the previous card occur, creating leftshift or rightshift on the demand curve, companies respond to this alteration in priceby changing their price, lower for lower demand and higher prices for higher demand. Therefore due to shifts in the demand curve, the price can be determined in a competitive market. 

 

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Supply determining price

Supply- The quantity that a producer is willing and able to produce at a given price at a given time period. 

When the price is high for a good, then suppliers are more willing to provide more hence the positive correlation of a supply graph line.

Movements along the supply curve:

Contraction- As prices decrease, the amount supplied decreases.

Extension- As price increases, the amount supplied increases. 

Movement in the supply curve:

Leftshift- Less quantity supplied at the same price.

Rightshift- More quantity supplied at the same price. 

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Supply determining price

What causes the supply curve to shift?

Productivity- Depending on how productive they are, it's either left or right.

Indirect forces- (VAT) if indirect taxes increase there will be leftshift as costs increase.

Number of firms entering market- Depending on how competitive the market is, left or right shift, if there are many firms in the market there is rightshift as more is being produced. 

Technology- If it can improve productivity, this will create a rightward shift in the supply curve.

Subsidies- Payment from government to businesses to lessen average costs for company and/or encourage higher production so rightward shift. 

Weather- For agricultural things, if there is bad harvest then less will be supplied, leftshift.

Costs of production- Affected by many factors above which can create leftshift if increased and rightshift if costs decrease. 

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How does supply affect price in a competitive mark

Supply affects price within a competitive market because if any of the factors on the previous card occur, creating leftshift or rightshift on the supply curve, individuals respond to this alteration in supply by changing their price.

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