How Prices Are Determined
Overview
Two identical tomatoes, grown in the same field on the same day. One sells for a few cents in a village market in August; the other sells for many times that in a city supermarket in January. Nobody set either price. No committee met. Both figures emerged from the same machinery, and this lesson takes that machinery apart piece by piece.
You will build a demand curve and a supply curve from data, learn the one distinction that examiners test more than any other in this course, between a shift of a curve and a movement along it, and find the equilibrium price where the two sides finally agree. Then you will meet elasticity: the measurement that tells a producer whether raising a price will raise revenue or destroy it, and the one calculation on this specification where leaving out a minus sign costs you a mark.
Objectives
- The factors which determine the demand for a good or service
- Causes of changes in demand
- The demand curve
- Supply for goods and services
- The factors which determine the supply of a good or service
- Causes of changes in supply
- The supply curve
- Equilibrium price
- How equilibrium price is determined by supply and demand
- How markets supply and demand diagrams can illustrate a producer’s revenue
- Intermarket relationships
- Complements and substitutes
- How changes in a particular market are likely to affect other markets
- Price elasticity of demand
- Price elasticity of demand
- Factors affecting price elasticity of demand
- Measuring price elasticity of demand
- Cross elasticity of demand
- Price elasticity of supply
- Price elasticity of supply
- Factors affecting price elasticity of supply
- Measuring price elasticity of supply
Mind map
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Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on How Prices Are Determined. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- Which of the following would cause the supply curve for oranges to shift to the left? A. A fall in the cost of fertiliser B. An increase in the price of oranges C. An increase in the wages of orange pickers D. The introduction of new technology in orange growing Answer: C
- The price of coffee rises. What is the likely effect in the market for tea, a substitute? A. Demand for tea shifts to the left B. Demand for tea shifts to the right C. Supply of tea shifts to the left D. There is a movement along the demand curve for tea Answer: B
- The price of a good rises by 20 per cent and quantity demanded falls by 30 per cent. What is the price elasticity of demand? A. -1.5 B. -0.67 C. 0.67 D. 1.5 Answer: A
- Which of the following would be most likely to make the price elasticity of supply of a firm's product elastic? A. The firm is already producing at full capacity B. The good can be stored after production C. The good is highly perishable D. The good takes two years to grow Answer: B
- At a price above the equilibrium price in a competitive market, what will exist? A. Excess demand, so price will rise B. Excess demand, so price will fall C. Excess supply, so price will fall D. Excess supply, so price will rise Answer: C
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