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1) Jill 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

A compulsory levy by the government, normally on income & 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/Population 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
PED formula
% change in quantity demanded / % change in price
26
Perfectly price inelastic
The quantity demanded does not change in response to price changes; PED = 0
27
Perfectly price elastic
Buyers are prepared to buy any amount at a given price, but demand falls to zero if the price rises; PED = - ∞
28
Describe an inelastic PED
PED < 1
29
Describe an elastic PED
PED > 1
30
Factors affecting PED (5)
- how close substitutes are to product - availability of substitutes - change of price of luxuries - addiction - whether purchase can be postponed
31
Income
the flow of money a person or household receives in a particular time period
32
Income elasticity of demand (YED)
measures the extent to which the demand for a good changes in response to a change in the income of consumers.
33
YED
% change in quantity demanded / % change in income
34
What is the YED for normal goods?
positive
35
What is the YED for inferior goods?
Negative
36
Cross elasticity of demand (XED)
measures the extent to which the demand for a good changes in response to a change in the price of another good.
37
XED formula
% change in quantity demanded of good X / % change in price of good Y
38
What is the XED for complementary goods?
Negative
39
What is the XED for substitutes?
Positive
40
Total cost
the whole cost of producing a particular level of output
41
Producer revenue
the amount of money received by producers from selling a given quantity of goods in a given period of time
42
Incentive function
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
Producer surplus
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
Indirect tax
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
Ad valorem tax
a tax added on as a percentage, such as VAT
46
Tax per unit
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
Subsidy
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
Law of supply
producers offer more of a good as its price increases and less as its price falls
49
Describe an increase in supply
a rightward shift of the supply curve
50
Describe a decrease in supply
a leftward shift of the supply curve
51
Describe an extension of supply
a movement along the supply curve to the right (higher price & higher quantity supplied).
52
Describe a contraction of supply
movement along the supply curve to the left (lower price & lower quantity supplied).
53
Producer revenue =
producer surplus + the cost to producers of supplying
54
Factors affecting supply (8)
- 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
Price elasticity of supply (PES)
measures the extent to which the supply of a good changes in response to a change in the price of that good
56
PES formula
% change in quantity supplied / % change in price
57
Factors determining PES (6)
- 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
Shortage
Excess demand
59
Surplus
Excess supply
60
Equilibrium price
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
Free market forces
forces in free markets which act to reduce prices when there is excess supply and raise prices when there is excess demand
62
Deadweight loss
the loss of welfare when the maximum attainable level of total welfare is not achieved
63
Joint supply
when one good is produced, another good is also produced from the same raw materials (e.g. beef and leather)
64
Joint demand
a good which is demanded at the same time as another good (e.g. printers and ink cartridges)
65
Competing demand
a good which can be used in place of the other good
66
Composite demand
demand for a good which has more than one use (e.g. oil for plastics and oil for petrol)
67
Derived demand
Quantity demand for a good which is an input into the production of another (e.g. houses and bricks)
68
Incidence of tax
The tax burden on the taxpayer
69
Incidence of subsidy
the subsidy burden on the subsidy recipient
70
Impact of changing price on revenue when demand is price elastic
reduction in price causes an increase in total revenue
71
Impact of changing price on revenue when demand is price inelastic
a price increase causes an increase in total revenue
72
Impact of changing price on revenue when demand is unitary price elastic
total revenue will remain unchanged as price changes

1) Jill AQA A-Level Economics (14 decks)

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