Price determination in a competitive market
The determinants of demand
Demand and markets
• Market: voluntary meetings buyers/sellers with exchange
• Demand: quantity good/service consumers willing/able buy at given prices in given time
• Supply: quantity good or service producers willing/able sell at given prices in given time
• Competitive markets: markets large no. buyers/sellers, possess good market info + low barriers entry/exit, accept ruling market
price
• Ruling market price: equilibrium price, where planned demand = demand supply
• Effective demand: desire for good or service backed by ability pay
➢ Households must first sell labour/services of any capital/land in markets for factors of production operate in goods
market
• Market demand: quantity good/service all consumers in market willing/able buy at different market prices
• Individual demand: quantity good/service particular consumer/individual willing/able buy at different market prices
• Law of demand: quantity demanded varies inversely with its prices for majority of products
Determinants/conditions of demand
1) Income
2) Marketing
3) Government policies
4) Economic situation
5) Population
6) Price Expectations
7) Tastes + Fashion
8) Substitute + Complement goods
Normal goods and inferior goods
• Normal good: a good for which demand increases as income rises + demand decreases as income falls
• Inferior good: a good for which demand decreases as income rises + demand increases as income falls
Are demand curves always sloped downwards?
• No. explanations upward-sloping demand curves (more demanded as good’s price increases):
1) Speculative demand: if price good such as housing/shares/foreign currency starts rise, people may speculate that in near
future, price rise even further (demand likely increase)
2) Goods for which consumers use price as indicator of quality: consumers may lack accurate information about quality
some goods they want to buy such as 2nd hand cars
➢ Potential buyer may demand more as good’s price rises, believing high price means high quality
3) Veblen goods: some companies try sell goods based on fact they cost more than competitors
➢ Named after Norwegian economist Thornstein Veblen; goods of exclusive/ostentatious consumption
➢ Can be called positional goods as signals of wealth
Price, income and cross elasticities of demand
Elasticity of demand
• Elasticity: proportionate responsiveness second variable to an initial change in first variable
• Price elasticity of demand: measures extent to which change in price good leads to change in quantity demanded
➢ % change quantity demanded/% change price
Type of PED/PES Numerical Value (PED – and PES +)
Perfectly Inelastic Demand 0
Perfectly Elastic Demand Infinity
Inelastic Demand <1
Elastic Demand >1
Unit Elastic Demand 1
The determinants of demand
Demand and markets
• Market: voluntary meetings buyers/sellers with exchange
• Demand: quantity good/service consumers willing/able buy at given prices in given time
• Supply: quantity good or service producers willing/able sell at given prices in given time
• Competitive markets: markets large no. buyers/sellers, possess good market info + low barriers entry/exit, accept ruling market
price
• Ruling market price: equilibrium price, where planned demand = demand supply
• Effective demand: desire for good or service backed by ability pay
➢ Households must first sell labour/services of any capital/land in markets for factors of production operate in goods
market
• Market demand: quantity good/service all consumers in market willing/able buy at different market prices
• Individual demand: quantity good/service particular consumer/individual willing/able buy at different market prices
• Law of demand: quantity demanded varies inversely with its prices for majority of products
Determinants/conditions of demand
1) Income
2) Marketing
3) Government policies
4) Economic situation
5) Population
6) Price Expectations
7) Tastes + Fashion
8) Substitute + Complement goods
Normal goods and inferior goods
• Normal good: a good for which demand increases as income rises + demand decreases as income falls
• Inferior good: a good for which demand decreases as income rises + demand increases as income falls
Are demand curves always sloped downwards?
• No. explanations upward-sloping demand curves (more demanded as good’s price increases):
1) Speculative demand: if price good such as housing/shares/foreign currency starts rise, people may speculate that in near
future, price rise even further (demand likely increase)
2) Goods for which consumers use price as indicator of quality: consumers may lack accurate information about quality
some goods they want to buy such as 2nd hand cars
➢ Potential buyer may demand more as good’s price rises, believing high price means high quality
3) Veblen goods: some companies try sell goods based on fact they cost more than competitors
➢ Named after Norwegian economist Thornstein Veblen; goods of exclusive/ostentatious consumption
➢ Can be called positional goods as signals of wealth
Price, income and cross elasticities of demand
Elasticity of demand
• Elasticity: proportionate responsiveness second variable to an initial change in first variable
• Price elasticity of demand: measures extent to which change in price good leads to change in quantity demanded
➢ % change quantity demanded/% change price
Type of PED/PES Numerical Value (PED – and PES +)
Perfectly Inelastic Demand 0
Perfectly Elastic Demand Infinity
Inelastic Demand <1
Elastic Demand >1
Unit Elastic Demand 1
