Competitive markets and how they work

Competitive markets and how they work

1. Demand: the quantity of goods and services that consumers are willing and able to buy at a given price level

   • Non price determinants= Subsitutues/complements, Population, Income, Taste/preference, Expected future prices
   • Change in price determinants cause movement along demand curve
   • Change in NPD cause a shift in the demand curve
   • Consumer surplus: the diff between the pirce that consumers are willing to pay and the actual price paid

2. Supply: the quantity of a product that producers are willing and able to provide at a given price level over a period of time

   • Non price determinant=Subsides/tax, Cost of input, Expected future prices, No of firms, Technology
   • Change in NPD cause a shift in supply curve
   • Change in cost causes a movement along the curve
   • Producer surplus: the diff between the price a producer is willing to accept and the price that is actually paid

3. Market equilibrium: the level of output where supply = demand

   • changing demand and supply means that the position of equilibrium changes
   • Disequilibrium: demand and supply are not equal- eg surplus and shortage

4. Elasticity

   • price elasticity of demand:the responsiveness of a change in demand to a %change in price
     • %change in QD / %change in price
     • factors affecting: price, avalability, substitutes, income, time(to react)
   • income elasticitiy of demand:the responsiveness of demand to a %change in price
     • %change in QD / %change in income
     • positive=normal, negative=inferior, high positive=luxury
   • cross elasticity of demand:the responsiveness of demand for 1 product in relation to change in price of another
     • %change in demand for good a / %change in demand for good b
     • if positive=substitutes, if negative=complements
   • price elasticity of supply:responsiveness of producers of a particular good to change in price of another good
     • %change of QS / %change in price
     • factors affecting=amount of time, unused capacity, ability to store stocks

5. Allocative efficiency:where customer satisfaction is maximised and resources are best used to benefit customers

   • competitive markets dont always lead to allocative efficiency as there is often under/over supply in the market