1.3 Price determination in a competitive market Flashcards

Question

How does a **necessity or luxury** determine YED?

Answer 1

at higher standards of living, increased consumer incomes see additional demand tend towards luxury goods as demand for necessities is satisfied

Answer 2

Poorer consumers spend on necessities, as they become wealthier YED for necessities moves towards zero Normal goods that are necesities will have a lower positive YED coefficient (inelastic) when incomes increase -> more likely to spend on luxuries these will have a higher positive YED coefficient (elastic)

Answer 3

measures the responsiveness of demand for one good, x, to a change in price of another good, y | % change in qd of good x / % change in price of good y

Answer 4

1. Substitutes 2. Complements 3. Has no relationship

Answer 5

Will have a positive XED, as price of good Y increases, demand for good X increases. Close substitutes will have a higher XED as consumer demand for good X will be more sensitive to a change in price of good Y. | e.g. if pepsi prices rise, coke demand would rise

Answer 6

Will have a negative XED as price for good x increases, demand for good y decreases. Close complements will have a higher XED as consumer demand for good x will be more sensitive to a change in price of good y. | e.g. if printer prices rise, ink demand would fall

Answer 7

the change in price of good Y will have no impact on the demand for good X. XED will be zero

Answer 8

the amount of a good or service that producers are willing and able to sell at any given price in a given time period

Answer 9

those that create and supply goods and services to a market

Answer 10

firms, because they want to make as much profit as possible

Answer 11

1. The impact of changing costs of production 2. Technological progress 3. Prices of other goods and services 4. Government policy e.g. tax & subsidies 5. Other factors e.g. expectations

Answer 12

are those placed on goods and services produced by individuals and firms

Answer 13

they involve finance provided to producers to encourage them to produce goods & services

Answer 14

a charge placed on individuals or firms. governments use taxation to finance their spending

Answer 15

if the cost of producing increases, it becomes more expensive for firms to supply. Leads to firms reducing output | vice versa

Answer 16

with advanced technology firms can supply at a more productive and efficient manner. large scale machinery allows them to spread fixed costs over greater output making cost per unit produced cheaper

Answer 17

Firms can use their factors of production to produce a range of products. If price of good A increases, this might make it more profitable to switch from supplying good B in order to supply good A. New firms enter markets with higher prices as their is a greater incentive to make profit.

Answer 18

1. **Indirect taxes** - make it more expensive to produce, leading to a decrease in supply 2. **Subsidies** - goverment grants, make it more cheaper to produce. leads to supply increasing

Answer 19

Expectations of future events Degree of competition in market Power of firms

Answer 20

y axis = price x axis = quantity supply increase = shift right supply decrease = shift left

Answer 21

measures the responsiveness of supply to a change in price | % change in quantity supplied / % change in price

Answer 22

1. Price 2. Ease of switching production methods 3. Time 4. Accumulating stocks 5. Space capacity 6. Length of production period

Answer 23

higher prices acts as an incentive for firms to increase supply higher price = higher profits

Answer 24

number and closeness of substitutes help determine PES if it is easy for firms to change production of its products (e.g. tables to chairs) then PES is likely to be very price elastic and vice versa easier it is to switch production the higher the PES

Answer 25

**Short run** - products are likely to be more price inelastic as producers find it difficult to increase production **Long run** - products are likely to be more price elastic as producers adjust to changing markets | e.g. buying machinery, new factories

Answer 26

if stocks of unsold goods can be stored at low costs the firms can respond quickly to a sudden increase in demand if price falls, firms can also divert from sales into stock accumulation this changes whether the good is perishable or not

Answer 27

if a firm possesses spare capacity (labour and raw materials are readily available) then production can be increased quickly in the short run

Answer 28

if firms can convert raw materials into finished goods quickly (hours or days) then supply will be more elastic than if it takes several months

Answer 29

the point at which demand is equal to supply. at this price all products have been sold and the market has cleared

Answer 30

the price at which all products are sold and the market has cleared

Answer 31

occurs when either demand or supply is greater than the other if **planned supply > planned demand** then price falls if **planned supply < planned demand** then price rises

Answer 32

buyers demand less at higher prices, and firms wish to produce more at higher prices, leads to too much supply. to solve this firms need to lower prices to get rid of excess products.

Answer 33

buyers demand more at lower prices but firms wish to supply less. leads to too much demand. to improve profitability firms could raise prices, thus reducing excess demand.

Answer 34

always pushing prices towards market equilibrium

Answer 35

Change in price leads to a movement along the curve. **However**, Change in any other factor leads to a shift in the curve.

Answer 36

There are changes in: 1. consumer income 2. prices of other g / s 3. consumer taste and fashion 4. other factors e.g. advertising

Answer 37

There are changes in: 1. cost of production 2. technological progress 3. prices of other g / s 4. taxes + subsidies 5. other factors e.g. expectation

Answer 38

resources are scarce, demand exceeds supply and prices are driven up. this is to discourage demand and conserve resources. contraction of demand along the demand curve.

Answer 39

higher prices provide an incentive to existing producers to supply more and increase their revenue and profits. extension of supply along the existing supply curve.

Answer 40

price changes send contrasting messages to consumers and producers about whether to enter or leave a market. **Rising prices** - consumers to reduce demand **Rising prices** - producers to enter market Conversely, **falling prices** signals consumers to enter and producers to leave. shifts in demand and supply curves

Answer 41

when demand for g/s in a market changes, it impacts other markets firms move away from market where demand has fallen and into where demand increases

Answer 42

goods that are complements are in joint demand complements have a -XED | e.g. Printer and ink are in joint demand

Answer 43

1. Number and closeness of available substitutes 2. Substitutes have a +XED

Answer 44

increase in demand for one g/s will restrict its availablity for another use. increase in demand for wheat will see a reduction in land available for barley, leading to a decrease in supply for barley and a rise in price for it | e.g. Land can be used to grow wheat or barley

Answer 45

when demand for a product occurs as a result of demand for another g/s all finished products create derived demand | e.g. demand for tinned tomatoes creates demand for the metal used

Answer 46

when the production of a product creates a by-products that can also be supplied when this occurs the supply curve will shift to the right for both products also leads to a decrease in price for both products | e.g increased production of sheep for meat will increase supply for wool