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Economics > 1.3 Price determination in a competitive market > Flashcards

1.3 Price determination in a competitive market Flashcards

1
Q

What does a demand curve show?

(1.3.1)

A

The relationship between price and quantity demanded

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2
Q

Define demand

(1.3.1)

A

The quantity of goods and services we are able and willing to buy at each price.
It is only effective if individuals want and can afford the product demanded.

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3
Q

What are the causes of shifts in demand?

(1.3.1)

A

PGTIPPS
* Price
* Government Policy
* Tastes/Fashion
* Income
* Price of Substitutes
* Price of Complements
* Seasonal/Weather

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4
Q

Define normal goods

(1.3.1)

A

A good where demand increases with income due to consumers’ increased ability to buy.

eg. houses, cars, holidays abroad

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5
Q

Define inferior goods

(1.3.1)

A

A good where demand decreases when income increases due to consumers now being less willing to demand.

eg. public transport, chocolate, fast food, betting

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6
Q

Define price elasticity of demand (PED)

(1.3.2)

A

The responsiveness of demand to changes in price

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7
Q

What is the PED formula?

(1.3.2)

A

percentage change in quantity demanded / percentage change in price

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8
Q

When is demand price inelastic?

(1.3.2)

A

When the co-efficient of PED is greater than 1 so demand is not particularly sensitive to changes in price

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9
Q

When is demand price elastic?

(1.3.2)

A

When the co-efficient of PED is less than 1 so demand is particularly sensitive to changes in price

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10
Q

When is demand perfectly price inelastic?

(1.3.2)

A

In an extreme case where PED=0 and demand does not vary at all with a change in price

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11
Q

When is demand perfectly price elastic?

(1.3.2)

A

In an extreme case where PED=∞ and a change in supply will not lead to a change in price

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12
Q

When is demand unitary price elastic?

(1.3.2)

A

In an extreme case where PED=1 and a change in price is met with a proportianate change in demand

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13
Q

What factors determine PED?

(1.3.2)

A
  • Number of close substitutes available
  • Proportion of income spent
  • Luxury or necessity
  • Habitual consumption (addictive)
  • Time
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14
Q

How does PED relate to firms’ revenue?

(1.3.2)

A

Where demand is price inelastic, firms will increase their revenue by increasing prices.
Where demand is price elastic, firms will increase their revenue by lowering prices.

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15
Q

Define Income Elasticity of Demand (YED)

(1.3.2)

A

The responsiveness of quantity demanded to changes in income

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16
Q

What is the YED formula?

(1.3.2)

A

Percentage change in quantity demanded to changes in real disposable income (Yd)

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17
Q

Define real income

(1.3.2)

A

Total individual income after adjusting for inflation

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18
Q

Define disposable income

(1.3.2)

A

Income after tax deductions and social security (NI) charges

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19
Q

Define economic cycle

(1.3.2)

A

Regular fluctuations in the level of economic activity around an economy’s productive potential

20
Q

When does YED show a normal good?

(1.3.2)

A

When YED is positive between 0 and +2

Positive sign denotes a normal good

21
Q

When does YED show an inferior good?

(1.3.2)

A

When YED is negative

Negative sign denotes a normal good

22
Q

When does YED show a luxury good?

(1.3.2)

A

When YED is positive above +2 and the increase in income will result in at least a x2 increase in demand

23
Q

How is demand for an income elastic good cyclical?

(1.3.2)

A

Demand for these products is highly responsive to changes in income and their sales are affected by the economic climate of the time so is therefore cyclical

YED>1

24
Q

When is demand for an income inelastic good most stable?

(1.3.2)

A

These products are not particularly sensitive to changes in disposable income so are most stable during fluctuations in the economic cycle. However, consumers’ spending on these goods will decline over time.

YED<1

25
Q

Define Cross Elasticity of Demand (XED)

(1.3.2)

A

The responsiveness of demand for one good (X) in relation to a change in price of a related good (Y)

ie. substitutes and complements

26
Q

What is the XED formula?

(1.3.2)

A

percentage change in quantity demanded for good X / percentage change in price for good Y

27
Q

When are products in competitive demand?

(1.3.2)

A

Substitutes
Where the increase in price of one good (Y) will cause an increase in demand for the substitute good (X)

XED for substitutes is always positive

28
Q

When are products in joint demand?

(1.3.2)

A

Complements
Where the fall in price of one good (Y) will cause an increase in demand for the complementary good (X)

XED for complements is always negative

29
Q

What influences XED?

(1.3.2)

A

How closely related the products are

30
Q

Define supply

1.3.3

A

The quantity of goods and services that all firms in a particular market are willing and able to produce or sell at each price over a given period of time

31
Q

What causes shifts in supply?

1.3.3

A

PINTSWC
* Productivity
* Indirect Tax
* Number of Firms
* Technology
* Subsidies
* Weather
* Costs of Production

32
Q

How does the marginal cost curve relate to the supply curve?

1.3.3

A

Under perfect competition, the supply curve is also the marginal cost curve

33
Q

What provides an incentive to expand production?

1.3.3

A

Expanding production will lead to higher market price, which implies higher profits.

34
Q

Define Price Elasticity of Supply (PES)

1.3.4

A

Responsiveness of supply to changes in price

35
Q

What is the PES formula?

1.3.4

A

percentage change in quantity supplied / percentage change in price

36
Q

When is supply price elastic?

1.3.4

A

When changes in demand can be met without a large increase in price because firms can quickly and efficiently increase production

PES>1

37
Q

When is supply price inelastic?

1.3.4

A

When supply is relatively unresponsive to changes in demand because firms find it difficult to change production levels quickly without a large increase in costs

38
Q

What factors affect PES?

1.3.4

A
  • Spare production capacity
  • Stock
  • Subsititution of Factors
  • Time period and production speed
39
Q

What is the market equilibrium?

1.3.5

A

Where demand = supply

40
Q

How does excess demand lead to changes in price?

1.3.5

A

Where the market price is lower than the equilibrium there is a shortage resulting from excess demand. Therefore, to take advantage of the high demand and eliminate the shortage, market price will increase to the equilibrium.

41
Q

How does excess supply lead to changes in price?

1.3.5

A

Where the market price is higher than the equilibrium there is a surplus resulting from excess supply. Therefore, firms will decrease prices to sell excess stock until equilibrium is restored.

42
Q

What is joint demand?

1.3.6

A

Where the demand for one product is directly related to market demand for a related good or service. Two complement are said to be in joint demand and XED is negative.

eg. Smartphones and the Market for apps

43
Q

What is competitive demand?

1.3.6

A

Demand for products that are competing for sales. Two substitutes are said to be in competitive demand and XED is positive.

Eg. Strawberries vs Raspberries

44
Q

What is composite demand?

1.3.6

A

Where goods and services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other

Eg. Milk for Cheese and Milk for Butter

45
Q

What is derived demand?

1.3.6

A

When the demand for one good is strongly linked to the demand for a related product

Eg. PCs and Intel chips

46
Q

What is joint supply?

1.3.6

A

A product process that can yield two or more outputs

Eg. Cows in the Market for Leather and also the Market for Steak

Economics (4 decks)

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