1.3 price determination in a competitive market Flashcards

1
Q

competing supply

A

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

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2
Q

competitive markets

A

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

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3
Q

complementary goods

A

goods in join demand; these goods are often bought together

e.g. printers and ink cartridges

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4
Q

composite demand

A

demand for a multi-purpose good

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4
Q

condition of demand

A

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

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5
Q

condition of supply

A

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

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6
Q

customer sovereignty

A

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

strongest in perfectly competitive markets

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7
Q

cross elasticity of demand (XED)

A

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

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8
Q

demand

A

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

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9
Q

derived demand

A

demand for a good that is the input of another good

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10
Q

disequilibrium

A

excess supply or demand in a market

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11
Q

effective demand

A

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

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12
Q

elasticity

A

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

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13
Q

equilibrium

A

no excess supply or demand in a market

a state of balance between opposing forces

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14
Q

equilibrium price

A

the price where planned demand matched planned supply

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15
Q

excess demand

A

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

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16
Q

excess supply

A

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

17
Q

exchange

A

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

18
Q

income elasticity of demand (YED)

A

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

19
Q

inferior good

A

a good for which demand rises as incomes fall

20
Q

joint supply

A

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

21
Q

normal good

A

a good for which demand rises as incomes rise

22
Q

price elasticity of supply

A

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

23
Q

producer sovereignty

A

producers determine what is produced and the prices charged

24
Q

substitute good

A

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

25
Q

supply

A

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

26
Q

6 factors which influence PED

A

necessity

addiction and habit

availability of substitutes

brand loyalty

proportion of income

time period

27
Q

acronym to remember factors which influence PED

A

NASBIT

28
Q

how being a necessity influences PED

A

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)

29
Q

how availability of substitutes affects PED

A

fewer subs, more likely to be inelastic

more subs, elastic

30
Q

how addiction and habit affects PED

A

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

31
Q

how brand loyalty affects PED

A

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

32
Q

how proportion of income affects PED

A

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

33
Q

how time period affects PED

A

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

34
Q

perfectly inelastic demand

A

price has no effect on QD

35
Q

example of perfectly inelastic demand

A

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

36
Q

perfectly elastic demand

A

can occur when there is lots of competition

consumers are very responsive to a change in price

PED = - infinity

37
Q

unitary elastic demand

A

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

PED = -1

38
Q

price elasticity of demand

A

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

39
Q

PED formula

A

% change in QD / % change in price

40
Q

what value will PED always be?

A

negative