1.3 price determination in a competitive market

Question 1

competing supply

Answer 1

when resources can be used to produce one good or another good, not both

Question 2

competitive markets

Answer 2

a market with large numbers of buyers and sellers, low barriers to entry and exit

Question 3

complementary goods

Answer 3

goods in join demand; these goods are often bought together

e.g. printers and ink cartridges

Question 4

composite demand

Answer 4

demand for a multi-purpose good

Question 4

condition of demand

Answer 4

determinant of demand other than the good’s price, that sets the position of the good’s demand curve

Question 5

condition of supply

Answer 5

a determinant of supply other than the good’s price, that sets the position of the good’s supply curve

Question 6

customer sovereignty

Answer 6

consumers can collectively govern production in a market via excercising spending power

strongest in perfectly competitive markets

Question 7

cross elasticity of demand (XED)

Answer 7

measures the responsiveness of a good’s demand to a change in the price of a different good

Question 8

demand

Answer 8

the quantity of a good or service that a consumer is willing and able to buy at a given price at a given time

Question 9

derived demand

Answer 9

demand for a good that is the input of another good

Question 10

disequilibrium

Answer 10

excess supply or demand in a market

Question 11

effective demand

Answer 11

desire for a good or service that is backed by the ability to pay for said good or service

Question 12

elasticity

Answer 12

the proportionate responsiveness of a second variable to a change in a first variable

Question 13

equilibrium

Answer 13

no excess supply or demand in a market

a state of balance between opposing forces

Question 14

equilibrium price

Answer 14

the price where planned demand matched planned supply

Question 15

excess demand

Answer 15

when consumers want to buy more than producers are willing to sell; occurs below equilibrium price

Question 16

excess supply

Answer 16

when producers want to sell more than consumers are willing to buy; occurs above equilibrium price

Question 17

exchange

Answer 17

trading objects of value, utilising media of exchange e.g. money

Question 18

income elasticity of demand (YED)

Answer 18

measures the responsiveness of a good’s demand to a change in the income of consumers

Question 19

inferior good

Answer 19

a good for which demand rises as incomes fall

Question 20

joint supply

Answer 20

when one good is produced, another good is also produced from the same raw materials

Question 21

normal good

Answer 21

a good for which demand rises as incomes rise

Question 22

price elasticity of supply

Answer 22

measures the responsiveness of a good’s supply to a change in price

Question 23

producer sovereignty

Answer 23

producers determine what is produced and the prices charged

Question 24

substitute good

Answer 24

a good in competing demand; a good that can be used in place of another similar good

Question 25

supply

Answer 25

quantity of a good or service that a producer is willing and able to sell at a given price at a given time

Question 26

6 factors which influence PED

Answer 26

necessity

addiction and habit

availability of substitutes

brand loyalty

proportion of income

time period

Question 27

acronym to remember factors which influence PED

Answer 27

NASBIT

Question 28

how being a necessity influences PED

Answer 28

necessity - needed to live lies

luxury - not needed but nice to have

necessity is unresponsive to change in price (inelastic)

luxury is responsive to change in price (elastic)

Question 29

how availability of substitutes affects PED

Answer 29

fewer subs, more likely to be inelastic

more subs, elastic

Question 30

how addiction and habit affects PED

Answer 30

cigarettes more likely to be inelastic, consumers forced by addiction to always consume similar quantity so demand won’t be responsive to a change in price

broccoli more likely to be elastic, consumers can easily switch to alternative vegetable

habits of using and consuming lead to addiction

hard to break habitual behaviour even if price changes

Question 31

how brand loyalty affects PED

Answer 31

strong brand loyalty - inelastic

consumers continue to demand because they don’t buy for price, they buy for brand, more responsive

weak brand loyalty - elastic

consumers aren’t concerned about price, less responsive

Question 32

how proportion of income affects PED

Answer 32

higher % of income, likely to be more elastic as a change in price is likely to affect the consumer more

inelastic - smaller % of income as there is smaller impact on consumers

Question 33

how time period affects PED

Answer 33

in short run demand is inelastic as there is less time to consider alternatives

long run is more elastic as more time to consider more alternatives

Question 34

perfectly inelastic demand

Answer 34

price has no effect on QD

Question 35

example of perfectly inelastic demand

Answer 35

life saving drugs and addictive drugs

a patient who needs the drug to save their life will continue to demand the same quantity of medication, they’ll be completely unresponsive to a change in price

addiction will force them to continue to buy the drug

Question 36

perfectly elastic demand

Answer 36

can occur when there is lots of competition

consumers are very responsive to a change in price

PED = - infinity

Question 37

unitary elastic demand

Answer 37

to % change in QD is the same as the % change in price

PED = -1

Question 38

price elasticity of demand

Answer 38

measures how much quantity demanded will respond to a change in price

Question 39

PED formula

Answer 39

% change in QD / % change in price

Question 40

what value will PED always be?

Answer 40

negative