Price determination in a competitive market

• What does a demand curve show and what is the relationship between price and quantity demanded?

  • The demand curve shows the relationship between the price of a good or service and the quantity demanded by consumers.
  • Generally, the demand curve slopes downwards from left to right, indicating an inverse relationship between price and quantity demanded (known as the Law of Demand).
  • As price rises, quantity demanded decreases.
  • As price falls, quantity demanded increases.
• Why does demand decrease when price increases?

  • Substitution effect: Consumers switch to substitute products when the price of a good increases.
  • Example: If the price of coffee rises, consumers may switch to tea.
  • Income effect: A price rise decreases the consumer's real income, leading them to buy less of the good.
  • Example: If bread becomes more expensive, people may buy less bread due to reduced purchasing power.
• What causes shifts in the demand curve?

  Factors like income, prices, preferences, and population
• How does an increase in income affect the demand for normal goods?

  It increases the demand for normal goods
• What happens to the demand for inferior goods when income increases?

  Demand for inferior goods decreases
• What are substitute goods?

  Goods that can replace each other
• What occurs when the price of a substitute good increases?

  Demand for the substitute increases
• If the price of Coca-Cola rises, what happens to the demand for Pepsi?

  Demand for Pepsi rises
• What are complementary goods?

  Goods that are used together
• What happens to the demand for complementary goods when the price of one good increases?

  Demand for the complement decreases
• If the price of printers increases, what happens to the demand for printer ink?

  Demand for printer ink falls
• How can changes in consumer preferences affect the demand curve?

  They can shift the demand curve
• What might happen to the demand for organic food due to a trend toward healthier eating?

  Demand for organic food may increase
• What effect do expectations about future prices have on current demand?

  They can increase current demand
• If consumers expect fuel prices to rise, what might they do?

  Fill their tanks early, raising current demand
• How does an increase in population affect demand?

  It raises the demand for goods and services
• What is an example of increased demand due to population growth?

  Increased demand for housing and healthcare
• What does Price Elasticity of Demand (PED) measure?

  Responsiveness of quantity demanded to price changes
• How is Price Elasticity of Demand (PED) calculated?

  PED = % change in quantity demanded / % change in price
• What does a PED greater than 1 indicate?

  Consumers are highly responsive to price changes
• Give an example of a product with elastic demand.

  Luxury goods like designer handbags
• What does a PED less than 1 indicate?

  Consumers are less responsive to price changes
• Give an example of a product with inelastic demand.

  Necessities like insulin
• What does unitary elastic demand (PED = 1) mean?

  Percentage change in quantity equals percentage change in price
• How does the concept of PED help businesses?

  It informs pricing strategies based on demand sensitivity
• What is the formula for calculating Price Elasticity of Demand (PED)?

  PED = % change in quantity demanded / % change in price
• What is one factor that influences price elasticity of demand (PED)?

  Availability of substitutes
• How does the availability of substitutes affect demand elasticity?

  More substitutes lead to more elastic demand
• If the price of one brand of soft drink rises, what might consumers do?

  Switch to another brand
• What type of goods tend to have inelastic demand?

  Necessities
• Why do luxuries have elastic demand?

  Consumers can forgo luxuries more easily
• What is an example of a necessity with inelastic demand?

  Medicine
• What is an example of a luxury with elastic demand?

  Vacations
• How does the proportion of income affect demand elasticity?

  Larger proportion leads to more elastic demand
• If the price of a car rises, how will demand likely change compared to bread?

  Demand for cars will decrease significantly
• Why is demand more elastic in the long run?

  Consumers have time to adjust their behavior
• What might people do if the price of gas rises consistently over time?

  Change their buying habits
• What are the main factors influencing price elasticity of demand (PED)?

  • Availability of substitutes
  • Necessity vs. luxury
  • Proportion of income
  • Time
• What does Income Elasticity of Demand (YED) measure?

  Demand response to changes in consumer income
• How is YED calculated?

  YED = % change in quantity demanded / % change in income