Booklet 2- price determination in competitive market

• Price mechanism 


  Signals changes in supply and demand by adjusting prices in response to shift in the market
• Demand


  Quantity of a good or service that consumers are willing to buy at a period of time
• Supply


  Amount of a good or service that producers are willing and able to supply at a given price
• Joint supply

  Goods that are provided together
• Composite demand


  Applies to products that are used for more than one purpose .An increase in demand will decrease in demand the availability for the other product
• Derived demand


  When the demand for one good or service comes from the demand for another good or service
• Inferior goods

  Goods whose demands decrease when incomes rise
• Excess demand


  Occurs when price of a good is lower than equilibrium price
• Excess supply


  Occurs when quantity demanded is less than quantity supplied at given price
• Consumer surplus


  Difference in how much consumers are willing to pay vs how much they actually pay
• Signalling

  Price gives consumers and producers information to decide what to do in a market
• Rationing


  If there is scarcity then price will increase as consumers bid up the price. Leads to fall in quantity
• Incentive

  • Producers seek to profit maximise so higher prices incentivises to increase quantity supplied
  • consumers have objective of maximising satisfaction therefore incentive to decease price
• Allocative


  Allocating scarce resources among competing uses
• Competing supply


  When a product can be used for more than one purpose
• Complementary goods

  Goods that can be used together