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AQA A level Economics 1.3 notes $9.67
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  7. 1.3 Price determination in a competitive market

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AQA A level Economics 1.3 notes
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An in-depth set of notes derived from a range of reputable sources covering each point in the AQA specification, enabling you to achieve the highest marks in the essay and multiple choice questions.

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  • June 20, 2023
  • 14
  • 2022/2023
  • Other
  • Unknown

Subjects

  • a level
  • economics
  • aqa

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  • A/AS Level
  • AQA
  • Economics
  • 1.3 Price determination in a competitive market
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1.3 Price determination in a
competitive market
1.3.1 The determinants of the demand for goods and
services
Demand is the quantity of a good or service that consumers are willing and able
to buy at given prices in a given period of time.

Effective Demand for a product is the desire for a good or service backed by an
ability to pay.

Basic Law of Demand - As price decreases, demand increases (inverse
relationship).

Derived demand is the demand for a factor of production used to produce
another good or service, e.g. demand for steel is derived by the market demand
for cars.

Composite demand exists where goods have more than one use - an increase
in the demand for one product leads to a fall in supply of the other, e.g. increase
in demand of milk for butter leads to decrease in demand of milk for yoghurt.




1.3 Price determination in a competitive market 1

, Income Effect

A fall in price increases the real purchasing power of consumers (increase in
their real income)

This allows people to buy more with a given budget.

Substitution Effect

A fall in the price of good X makes it relatively cheaper compared to
substitutes

Some consumers will switch to good X leading to higher demand.


Causes of shifts in the Demand Curve
Changing price of a substitute good in competitive demand

Changing price of a complement good - i.e. in joint demand

Change in the real income of consumers

Effects of advertising or marketing

Tastes and preferences

Population size

Interest rates or tax

Speculation or consumer confidence

Seasonal factors.



Normal goods - income increases, demand increases

Inferior goods - income increases, demand decreases

Veblen goods - price increases, demand increases

Giffen good - price increases, demand increases


1.3.2 Price, income and cross elasticities of demand
PED
PED measures the responsiveness of quantity demanded after a change in the
good’s own price



1.3 Price determination in a competitive market 2

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