competitive markets

• price charged and quantity sold is dependant on levels of supply and demand in a market
• demand is the quantity of a good or service that a consumer is willing and able to buy at a given price at a given time
• demand curves slope downwards as the higher the price charged, the lower quantity demanded

  
• the relationship between price and quantity demanded can be explained through the law of diminishing return
• movements int he demand curve are due to changes in price
• movements in the demand curve are known as contractions and extensions
• if the demand curve shifts, there is a change in non-price factors
• a shift to the left of a demand curve = decrease in demand
• a shift to the right of a demand curve = increase in demand
• causes for shifts in demand: changes to income, advertising, changes to fashion and tastes, changes to weather and season, competition actions and substitutes, changes in price of complementary goods, changes to population, changes to interest rates.
• normal goods increase in demand if income increases
• inferior goods will decrease in demand if real income increases
• luxury goods will decrease in demand if there is a more equal distribution of income
• a substitute good is a good that has alternatives - an increase in price of one good will increase the demand for the substitute good
• complementary goods are used together - if price of one good increases, the demand of both goods will decrease
• derived demand is demand for a g/s or factor of production in the making of another g/s.
• composite demand is where one product has multiple uses and is used in different ways by different consumers
• price elasticity of demand is a measure of the responsiveness of a change in price on the change of quantity demanded
• PED = % change in quantity demanded /% change in price
• if the value of PED is greater than 1, the demand for a good is elastic
• if the value of PED is between 0 and 1, PED is inelastic
• perfect inelastic demand has a PED of 0 and anychage in price will have no effect on demand

  
• inelastic PED means that a percentage change in price will cause a smaller proportional change in demand

  
• perfect elastic demand means that any change in price will cause demand to fall to zero

  
• elastic demand means that the percentage change in price will cause a greater proportional change in quantity demanded

  
• unit elasticity of demand is when the percentage change in price os equal to the percentage change in demand

  
• income elasticity demand (YED) is a measure of how much the demand of a good changes given a change in real income
• YED = % change in quantity demanded / % change in income
• income elastic demand is less than 1

  
• income inelastic demand is greater than 1
• perfect inelastic where YED = 0
• cross elasticity of demand (XED) is a measure of how the quantity demanded of one good responds to a cognate in the price of another
• XED = % change in quantity demanded of good A / 5 change in price of good B
• substitutes will have a positive XED
• complements will have a negative XED
• if a good has a lot of substitutes there will be greater price elastic demand
• demand for essential items in inelastic
• demand for non-essential items is price elastic
• demand for hair forming goods (or addictive goods) is normally price inelastic
• emergency purchases of goods which cannot be postponed tend to be price inelastic