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AQA A-Level Economics > 1.3 Price determination in a competitive market > Flashcards

1.3 Price determination in a competitive market Flashcards

1
Q

Law of demand

A

As price increases, quantity demanded decreases. As price decreases, quantity demanded increases.

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2
Q

Market

A

anywhere where buyers and sellers come together, a price is agreed and a transaction takes place

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3
Q

Price

A

that which is given up in an exchange to acquire a good or service

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4
Q

Demand

A

the quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time

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5
Q

Consumer expenditure

A

the amount of money consumers spend on a given quantity of goods in a given period of time

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6
Q

Rationing function of prices

A

rising prices ration demand for a product

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7
Q

Consumer surplus

A

a measure of the economic welfare enjoyed by consumers; surplus utility received over and above the price paid for a good

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8
Q

Utility

A

the satisfaction or economic welfare an individual gains from consuming a good

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9
Q

Law of diminishing marginal utility

A

for a single consumer, the marginal utility derived from a good diminishes for each additional unit consumed

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10
Q

Normal good

A

when the demand for a good increases as incomes rises and demand decreases as income fall

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11
Q

Inferior good

A

when the demand for a good decreases as income rises and demand increases as income falls

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12
Q

Complementary good

A

a good which is in joint demand, or which is demanded at the same time as the other good

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13
Q

Substitute good

A

a good in competing demand, or which can be used in place of the other good

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14
Q

Direct tax

A

a tax which cannot be shifted by the person legally liable to pay the tax onto someone else. They are normally levied on income and wealth

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15
Q

Causes of changes in demand (7)

A
  • change in price or related goods
  • changes in incomes
  • Fashions, Tastes and preferences
  • Advertising and branding
  • Demographic change
  • External shocks
  • Seasonal factors
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16
Q

Describe an increase in demand

A

a rightward shift of the demand curve

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17
Q

Describe a decrease in demand

A

a leftward shift of the demand curve

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18
Q

Describe an extension in demand

A

the increase in quantity demanded due to a fall in price

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19
Q

Describe a contraction in demand

A

the fall in the quantity demanded due to a rise in price

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20
Q

Total revenue

A

the total amount of money a firm receives by selling goods or services

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21
Q

Total revenue formula

A

Price x Quantity

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22
Q

Marginal revenue

A

the change in total revenue generated by an additional unit of output

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23
Q

Marginal revenue formula

A

change in total revenue / change in quantity

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24
Q

Price elasticity of demand (PED)

A

measures the extent to which the demand for a good changes in response to a change in the price of that good

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25
Q

PED formula

A

% change in quantity demanded / % change in price

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26
Q

Perfectly price inelastic

A

The quantity demanded does not change in response to price changes; PED = 0

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27
Q

Perfectly price elastic

A

Buyers are prepared to buy any amount at a given price, but demand falls to zero if the price rises; PED = - ∞

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28
Q

Describe an inelastic PED

A

PED < 1

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29
Q

Describe an elastic PED

A

PED > 1

30
Q

Factors affecting PED (5)

A
  • how close substitutes are to product
  • availability of substitutes
  • change of price of luxuries
  • addiction
  • whether purchase can be postponed
31
Q

Income

A

the flow of money a person or household receives in a particular time period

32
Q

Income elasticity of demand (YED)

A

measures the extent to which the demand for a good changes in response to a change in the income of consumers.

33
Q

YED

A

% change in quantity demanded / % change in income

34
Q

What is the YED for normal goods?

A

positive

35
Q

What is the YED for inferior goods?

A

Negative

36
Q

Cross elasticity of demand (XED)

A

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

37
Q

XED formula

A

% change in quantity demanded of good X / % change in price of good Y

38
Q

What is the XED for complementary goods?

A

Negative

39
Q

What is the XED for substitutes?

A

Positive

40
Q

Total cost

A

the whole cost of producing a particular level of output

41
Q

Producer revenue

A

the amount of money received by producers from selling a given quantity of goods in a given period of time

42
Q

Incentive function

A

when prices for a good/service rise, it incentivises producers to reallocate resources from a less profitable market to this market in order to maximise their profits

43
Q

Producer surplus

A

a measure of the economic welfare enjoyed by firms or producers: the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept

44
Q

Indirect tax

A

a tax which can be shifted by the person legally liable to pay the tax onto someone else, for example through raising the price of a good being sold by the taxpayer. They are normally levied on spending

45
Q

Ad valorem tax

A

a tax added on as a percentage, such as VAT

46
Q

Tax per unit

A

a set tax levied per good sold, regardless of the good’s price, such as passenger duty on airfares; causes a leftward shift in supply curve

47
Q

Subsidy

A

a payment made by government or other authority, usually to producers, for each unit of the relevant good they produce; causes a rightward shift of the supply curve

48
Q

Law of supply

A

producers offer more of a good as its price increases and less as its price falls

49
Q

Describe an increase in supply

A

a rightward shift of the supply curve

50
Q

Describe a decrease in supply

A

a leftward shift of the supply curve

51
Q

Describe an extension of supply

A

a movement along the supply curve to the right (higher price & higher quantity supplied).

52
Q

Describe a contraction of supply

A

movement along the supply curve to the left (lower price & lower quantity supplied).

53
Q

Producer revenue =

A

producer surplus + the cost to producers of supplying

54
Q

Factors affecting supply (8)

A
  • Changes in costs of production
  • Introduction of new technology
  • Indirect taxes
  • Government subsidies
  • External Shocks
  • changes in productivity
  • changes in prices of other goods
  • new firms entering the market
55
Q

Price elasticity of supply (PES)

A

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

56
Q

PES formula

A

% change in quantity supplied / % change in price

57
Q

Factors determining PES (6)

A
  • The length of production period
  • The availability of spare capacity
  • The ease of accumulating stocks
  • The ease of switching between alternative production methods
  • The number of firms in the market
  • The ease of entering the market
58
Q

Shortage

A

Excess demand

59
Q

Surplus

A

Excess supply

60
Q

Equilibrium price

A

price where quantity supplied equals quantity demanded.at this price there is no shortage or surplus, and there is no tendency for the market price to change

61
Q

Free market forces

A

forces in free markets which act to reduce prices when there is excess supply and raise prices when there is excess demand

62
Q

Deadweight loss

A

the loss of welfare when the maximum attainable level of total welfare is not achieved

63
Q

Joint supply

A

when one good is produced, another good is also produced from the same raw materials (e.g. beef and leather)

64
Q

Joint demand

A

a good which is demanded at the same time as another good (e.g. printers and ink cartridges)

65
Q

Competing demand

A

a good which can be used in place of the other good

66
Q

Composite demand

A

demand for a good which has more than one use (e.g. oil for plastics and oil for petrol)

67
Q

Derived demand

A

Quantity demand for a good which is an input into the production of another (e.g. houses and bricks)

68
Q

Incidence of tax

A

The tax burden on the taxpayer

69
Q

Incidence of subsidy

A

the subsidy burden on the subsidy recipient

70
Q

Impact of changing price on revenue when demand is price elastic

A

reduction in price causes an increase in total revenue

71
Q

Impact of changing price on revenue when demand is price inelastic

A

a price increase causes an increase in total revenue

72
Q

Impact of changing price on revenue when demand is unitary price elastic

A

total revenue will remain unchanged as price changes

AQA A-Level Economics (14 decks)

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