(1) Chapter 2 - Price Determination in a Competitive Market

Question 1

What is a COMPETITIVE MARKET?

Answer 1

A market where a large number of buyers and sellers possess good market information + can easily enter and leave

Question 2

What is EQUILIBRIUM PRICE?

Answer 2

A price where demand exactly equals planned supply

Question 3

What is SUPPLY?

Answer 3

Quantity of a good/service that a firm is willing and able to sell at a given price

Question 4

What is DEMAND?

Answer 4

Quantity of a good/service that a consumer is willing and able to buy at a given price

Question 5

What is EFFECTIVE DEMAND?

Answer 5

The desire for a good/service backed by the ability to pay

Question 6

What does an INCREASE IN DEMAND show?

Answer 6

A rightward/upward of the demand curve

Question 7

What does a DECREASE IN DEMAND show?

Answer 7

A leftward/downward shift in the demand curve

Question 8

What is a NORMAL GOOD?

Answer 8

A good where the demand mimics the fall/rise of income

Question 9

What is an INFERIOR GOOD?

Answer 9

A good where if income rises, demand falls.
If income falls the demand increase.
Eg Tesco Value products

Question 10

What is meant by ELASTICITY?

Answer 10

The proportionate responsiveness of a second variable from the change in the first variable

Question 11

What is meant by PRICE ELASTICITY OF DEMAND?

Answer 11

How much the demand for a good changes in response to a change in price

Question 12

How do you calculate PRICE ELASTICITY OF DEMAND?

Answer 12

Price elasticity of demand =

Percentage change in quantity demanded /
Percentage change in price

Question 13

How do you calculate INCOME ELASTICITY OF DEMAND?

Answer 13

Income elasticity of demand =

Percentage change in quantity demanded /
Percentage change in income

Question 14

How do you calculate CROSS-ELASTICITY OF DEMAND?

Answer 14

Percentage change in quantity of A demanded /

Percentage change in price of B

Question 15

What does PERFECTLY ELASTIC DEMAND look like?

Answer 15

A straight horizontal line

Question 16

What does COMPLETELY INELASTIC DEMAND look like?

Answer 16

A straight vertical line

Question 17

What type of ELASTICITY will a good have if there are close substitutes available?

Answer 17

The demand for the product is highly elastic

Question 18

What factors determine PRICE ELASTICITY OF DEMAND?

Answer 18

• Substitutability
• Percentage of income
• Necessities or luxuries
• The ‘width’ of the market definition
  (The wider the market, the lower the price elasticity of demand)
• Time

Question 19

What is meant by INCOME ELASTICITY OF DEMAND?

Answer 19

How demand responds to a change in income

Question 20

Question!
Peoples average income fall from £1000 to £600. As a result, demand for potatoes increase from 1m tonnes to 1.2m tonnes.
Calculate the income elasticity of demand for potatoes.

Answer 20

20% / -40%
= -0.5
The minus sign indicates that it is an inferior good. The number 0.5 shows that the demand is inelastic

Question 21

What is meant by CROSS-ELASTICITY OF DEMAND?

Answer 21

The extent to which the demand for a good changes in response to a change in the price of another good

Question 22

What are the three possibilities of CROSS-ELASTICITY OF DEMAND?

Answer 22

• Complementary goods
• Substitutes
• An absence of any discernible demand relationship

Question 23

What is meant by PROFIT?

Answer 23

The difference between total sales revenue and total cost of production

Question 24

What is meant by TOTAL REVENUE?

Answer 24

The money a firm receives from selling its output

Question 25

What are the main CONDITIONS OF SUPPLY?

Answer 25

- Cost of production - Technical progress - Taxes - Subsidies granted

Question 26

What does an INCREASE in supply look like?

Answer 26

A rightward of the supply curve

Question 27

What does a DECREASE in supply look like?

Answer 27

A leftward shift of the supply curve

Question 28

What is meant by PRICE ELASTICITY OF SUPPLY?

Answer 28

The extent to which the supply of a good changes in response to the change of price

Question 29

What is excess supply?

Answer 29

When a firm wish to sell more than consumers wish to buy

Question 30

What is excess demand?

Answer 30

When consumers wish to buy more than firms would like to sell

Question 31

What is joint supply?

Answer 31

When two different goods can be produced using the same material

Question 32

What is competing supply?

Answer 32

When two goods require the exact same material to be made so they can’t both use the same material

Question 33

What is complementary goods?

Answer 33

Where different goods are demanded at the same time as each other

Question 34

What is a substitute good?

Answer 34

Different goods where they could easily be replacements for each other

Question 35

What is composite demand?

Answer 35

Demand for a good which has more than one use

Question 36

What is derived demand?

Answer 36

Demand for a good which is an input for the production of another good

Question 37

What is allocative efficiency?

Answer 37

When the available economic resources are used to produce the combination of goods/services that match the people’s preferences

Question 38

What is productive efficiency?

Answer 38

When the economy cannot produce more of one good without producing less of another

Question 39

What is a merit good?

Answer 39

A good which when consumed leads to benefits for the people

Question 40

What is the elasticity if PED = 0

Answer 40

Perfectly Inelastic

Question 41

What is the elasticity if PED 0 < PED < 1

Answer 41

Inelastic

Question 42

What is the elasticity if PED = 1

Answer 42

Unit Elastic

Question 43

What is the elasticity if 1 < PED

Answer 43

Elastic

Question 44

What is the elasticity if PED is infinite

Answer 44

Perfectly Elastic