price determination in competitive market

• What does the demand curve illustrate?

  The relationship between quantity demanded and price
• What is price in the context of demand?

  The amount paid for a good or service
• What is quantity demanded?

  Total number of units purchased at a price
• What does a downward sloping demand curve indicate?

  Higher prices lead to lower demand
• What does the law of demand state?

  There is an inverse relationship between price and quantity
• What is willingness to pay?

  Desire to pay based on preferences
• What factors influence ability to pay?

  Income and affordability of goods
• What happens to the quantity demanded of a substitute good when its price increases?

  Quantity demanded of the other good increases
• What happens to the quantity demanded of a complement good when its price increases?

  Quantity demanded of the other good decreases
• What is the income effect?

  Consumers can afford more goods when prices fall
• What is the substitution effect?

  Consumers buy more of cheaper goods when prices fall
• What causes the demand curve to shift right?

  An increase in demand at each price level
• What can cause the demand curve to shift left?

  A decrease in demand at each price level
• How does a change in income affect normal goods?

  Increased income leads to increased quantity demanded
• How does a change in income affect inferior goods?

  Increased income may reduce quantity demanded
• What happens to the demand curve when prices change?

  Movements occur along the curve
• What occurs when there is a rise in price?

  Demand contraction occurs
• What occurs when there is a fall in price?

  Demand extension occurs
• What does elasticity measure?

  Responsiveness of one variable to another
• What is the formula for price elasticity of demand (PED)?

  • Price elasticity = % change in quantity demanded ÷ % change in price
• What indicates elastic demand in terms of PED?

  PED > 1
• What indicates inelastic demand in terms of PED?

  PED < 1
• What indicates unitary elasticity in terms of PED?

  PED = 1
• Why is PED almost always negative?

  Price increase leads to decreased demand
• What is the formula for income elasticity of demand (YED)?

  • Income elasticity of demand = % change in quantity demanded ÷ % change in income
• What type of goods have a positive income elasticity?

  Normal goods
• What type of goods have a negative income elasticity?

  Inferior goods
• What happens to the demand for inferior goods when income rises?

  Demand decreases
• What is cross-price elasticity of demand (XED)?

  • Change in price of one good affects quantity demanded of another
  • Formula: XED = % change in quantity demanded of good A ÷ % change in price of good B
• What does a positive XED indicate?

  Goods are substitutes
• What does a negative XED indicate?

  Goods are complements
• What does an XED close to zero suggest?

  Goods are unrelated
• What happens to the quantity demanded of complements when the price of one falls?

  • Quantity demanded of the other good increases
  • Complements have negative cross-price elasticities
• What happens to the quantity demanded of substitutes when the price of one falls?

  • Quantity demanded of the other good decreases
  • Substitutes have positive cross-price elasticities
• What is the cross-price elasticity of independent goods?

  XED = 0
• What is perfectly elastic demand?

  • PED = +/- infinity
  • Any price increase causes demand to drop to zero
• What is perfectly inelastic demand?

  • PED = zero
  • Any price change won't affect demand
• How does a perfectly inelastic demand curve appear on a diagram?

  It looks vertical
• What does a more inelastic demand curve resemble?

  It looks like an 'i'
• What happens to revenue if demand is inelastic and price increases?

  Revenue increases with price increase