Equilibrium Price and Quantity, Economic Systems; Cross-Price Elasticity of Demand (Cped); Iv) Income Elasticity of Demand (Ieod);

1468 Words Jan 11th, 2013 6 Pages
Economics Assignment 1 i) Equilibrium price and quantity;
The Equilibrium price is set when the supply and demand meet when the quantity demanded by the customer (market demand) and the quantity that the companies (suppliers) are willing to supply the goods/services.
For example if you take a look at this graph you can see that at the cross section, where the lines of supply and demand meet, the equilibrium point is shown. This is the “market clearing price” where supply equals demand.
Equilibrium Point;
Equilibrium Point;

Figure 1-Sourced from Bized
Market clearing price is used as a justification to what price they should sell at. This is to help the market be clear of all shortages and surpluses, for instance if there is
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The CPED tends to focus on the interactions between changes in the prices of substitutes and complement goods and how they affect demand. It is calculated as the; percentage change in demand of product A divided by the percentage change in price of product B.
Substitute Goods (next best thing) are similar and alike to another good, therefore we expect that when the price of one good increases, the demand for the other good increases. Complementary Goods (goods which accompany a good, for example car and petrol) are affected if the demand for the good increases with demand for another good.
If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases. Similarly if the two goods are complements, we should see a price rise in one good cause the demand for both goods to fall
If goods are compliments, the CPED will be negative, for instance when the charge of DVDs rises,
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