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Price Determination in a Competitive Market (The Conditions of Demand:…
Price Determination in a Competitive Market
Competitive Market
- A market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market
Equilibrium Price
- The price at which planned demand for a good or service exactly equals planned supply
Supply
- The quantity of a good or service that firms are willing and able to sell at given prices in a given period of time
Market Supply
- The quantity of a good or service that all firms plan to sell at given prices in a given period of time
Demand
- The quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time. For economists, demand is always effective demand
Effective Demand
- The desire for a good or service backed by an ability to pay.
Market Demand
- The quantity of a good or service that all consumers in a market are willing and able to buy at different market prices
Condition of Demand
- A determinant of demand, other than the good's own price, that fixes the position of the demand curve
A movement along a demand curve take place
only
when the goods price changes
An extension of the demand occurs occurs when there is a fall in price resulting in more of the good being demanded
A contraction of demand occurs when a rise in price leads to less being demanded
The Conditions of Demand:
Personal income (or more strictly personal disposable income, after tax and receipt of benefits)
Tastes and preferences
The prices of goods in joint demand or complementary good
Population size, which influences total market size
The price of substitute goods or goods in competing demand
If any of the conditions change the demand curve shifts left or right
Normal Good
- A good for which demand increases as income rises and demand decreases as income falls
Inferior Good
- A good for which demand decreases as income rises and demand increases as income falls
The Conditions of Supply:
Costs of production including; wage costs, raw material costs, energy costs and costs of borrowing
Technical Progress
Taxes imposed on firms, such as VAT, excise duties and the business rate
Subsidies granted by the government to firms
Condition of Supply
- Determinants of supply, other than the good's own price, that fix the position of the supply curve
Profit
- The difference between total sales revenue and total costs of production
Total Revenue
- The money a firm receives from selling its output, calculated by multiplying the price by the quantity sold
Market Equilibrium
- A market is in equilibrium when planned demand equals planned supply and the demand curve crosses the supply curve. In this situation there is no excess demand or excess supply in the market. Unless some event disturbs the equilibrium, there is no reason for the price to change.
Joint Supply
- When one good is produced, another good is also produced from the same raw materials
Competing Supply
- When raw materials are used to produce one good they cannot be used to produce another good
Complementary Good
- A good in joint demand, or a good which is demanded at the same time as the other good
Substitute Good
- A good in competing demand, namely a good which can be used in place of another good
Composite Demand
- Demand for a good which has more than one use
Derived Demand
- Demand for a good which is an input into the production of another good