Price Determination in a Competitive Market

• What is demand in economics?

  Quantity of a good consumers buy at a price
• How does demand vary with price?

  Lower prices increase consumer demand
• What does the demand curve illustrate?

  • Relationship between price and quantity demanded
  • Lower prices lead to higher demand
  • Higher prices lead to lower demand
• What happens at price P1 on the demand curve?

  A quantity of Q1 is demanded
• What is an expansion of demand?

  Higher quantity demanded at a lower price
• What is a contraction of demand?

  Lower quantity demanded at a higher price
• What causes movements along the demand curve?

  Changes in price
• What does shifting the demand curve indicate?

  • Price changes do not shift the demand curve
  • Inward shift: lower quantity demanded
  • Outward shift: higher quantity demanded
• What does a shift from D1 to D2 represent?

  An inward shift in demand
• What does a shift from D1 to D3 indicate?

  An outward shift in demand
• What mnemonic helps remember factors that shift the demand curve?

  PIRATES
• What does the 'P' in PIRATES stand for?

  Population
• How does population affect demand?

  Larger population increases demand
• What does the 'I' in PIRATES represent?

  Income
• How does income affect consumer demand?

  Higher income increases demand for goods
• What does the 'R' in PIRATES refer to?

  Related goods
• What is a substitute good?

  A good that can replace another good
• What happens if the price of a substitute falls?

  Demand for the original good falls
• What is a complement good?

  A good that goes with another good
• What happens if the price of strawberries increases?

  Demand for cream will fall
• What does the 'A' in PIRATES stand for?

  Advertising
• How does advertising affect demand?

  Increases consumer loyalty and demand
• What does the 'T' in PIRATES represent?

  Tastes and fashions
• How do changes in consumer tastes affect demand?

  Shifts the demand curve
• What does the 'E' in PIRATES stand for?

  Expectations
• How do expectations of future price changes affect demand?

  Can increase current demand
• What does the 'S' in PIRATES represent?

  Seasons
• How does demand change according to the season?

  Varies with seasonal products
• What is diminishing marginal utility?

  • Demand curve is downward sloping
  • Inverse relationship between price and quantity
  • Benefit from consuming additional units falls
• What does the law of diminishing marginal utility state?

  Marginal utility falls as more is consumed
• Why are consumers willing to pay less for additional units?

  Because marginal utility decreases
• How does the first chocolate bar affect consumer willingness to pay?

  Consumer is willing to pay more for it
• What happens to consumer satisfaction with each additional chocolate bar?

  It decreases with each additional bar
• What eventually happens to the utility derived from consuming a good?

  It can become zero
• How does the demand curve relate to price and quantity?

  • Downward sloping curve
  • Shows inverse relationship
  • Higher prices lead to lower quantities demanded
• What is the price elasticity of demand (PED)?

  Responsiveness of demand to price change
• What does a price elastic good indicate?

  Demand changes significantly with price changes
• What is the numerical value for PED of a price elastic good?

  Greater than 1
• What characterizes a price inelastic good?

  Demand is relatively unresponsive to price changes
• What is the PED value for a unitary elastic good?

  Equal to 1