The Allocation of Resources in Competitive Markets

What the spec says we need to know about:

• The Determinants of the Demand for Goods and Services
• Price, Income and Cross Elasticities of Demand
• The Determinants of the Supply of Goods and Services
• Price Elasticity of Supply
• The Determination of Equilibrium Market Prices
• Applications of Demand and Supply Analysis to Particular Markets
• The Interrelationship Between Markets
• How Markets and Prices Allocate Resources

The determinants of the demand for goods and services

Demand is the quantity of a good or service that consumers are willing and able to buy at a given price, at a particular time.

A demand curve shows the relationship between price and the quantity demanded. At any given point along the curve it shows the quantity of the good or service that would be bought at a particualr price.

Demand curves usually slope downwards. This means that the higher the price charged for a good, the lower the quantity demanded.

In general, consumers aim to pay the lowest price possibel for goods and services. As prices decreases more consumers are willing and able to purchase a good or service- so lower prices means higher demand.

A demand curve shifts to the left when there is a decrease in the amount demanded at every price. 

A demand curve shifts to the right when there is an increase in the amoutn demanded at every price.

Changes in tastes and fashions can cause demand curves to shift to the right if something is popular and to the left when it is out of fashion.

Changes in people's real income (the amount of goods/services that a consumer can afford to purchase with their income) can affect the demand for different types of goods differently:

• Normal goods are those which people will demand more of if their real income increases. This means that a rise in real incomes causes the demand curve to shift to the right- people want to buy more of the good at each price level
  
• Inferior goods are those which people demand less of if their real income increases. This means that a rise in real income cause the demand curve to shift to the left- people demand less at each price level since they'll often switch to more expensive goods
• A more equal distribution of income (a reduction in the difference between the incomes of the rich and the poor people) may cause the demand curve for luxury goods to shift to the left- and the demand curve for other items to shift to the right. This is because there'll be fewer really rich people who can afford luxury items, and more people who can afford everyday items

Some markets are interrelated, which means that changes in one market affect a related market:

• Substitute goods are those which are alternatives to each other. An increase in the price of one good will increase the demand for the other good
  
• Complementary goods are goods that are often used together, so they're in joint demand. If…