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AQA Economics > 2 - Price Determination > Flashcards

2 - Price Determination Flashcards

1
Q

Demand?

A

The quantity of a good/service that consumers are willing and able to buy at a given price at a particular time

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2
Q

Extension?

A

(Decrease graph)

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3
Q

Contraction?

A

(Increase graph)

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4
Q

Income effect?

A

Assuming a fixed level of income,

As price falls, the amount consumers can buy with their income increases

= more demand

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5
Q

Substitution effect?

A

A fall in price of a good makes it cheaper than others

= more demand for it

= less demand for other goods

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6
Q

LEFT shift in demand

A

Out of fashion

Inferior goods

Changes in real income

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7
Q

RIGHT shift in demand

A

Normal goods

Changes in real income

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8
Q

Normal good?

A

For which demand increases as income rises

  • vice versa
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9
Q

Inferior good?

A

For which demand decreases as income increases

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10
Q

Substitute good?

A

Alternatives to each other

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11
Q

Complementary good?

A

Often used together

known as joint demand

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12
Q

Condition of demand?

A

A determinant of demand that fixes the position of the demand curve

  • population
  • tastes + preferences
  • personal income
  • prices of complementary + substitute goods
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13
Q

Derived demand?

A

For a good / factors of production used in making another good/service

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14
Q

Composite demand?

A

Some goods have more than one use

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15
Q

Effective demand?

A

Desire for a good/service backed by an ability to pay

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16
Q

Price elasticity of demand

PED

A

Measure of how the quantity demanded of a good responds to a change in its price

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17
Q

How to calculate PED

A

% change in quantity demand

DIVIDED BY

% change in price

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18
Q

PED graphs

A

(Insert photo)

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19
Q

Factors determining PED

A

SUBSTITUTES

  • the more a good has, the more price elastic it is

TIME

  • as it becomes easier to change to alternatives because consumers had enough time to shop around

TYPE OF GOOD/SERVICE

  • Necessities (inelastic)
  • Luxuries (elastic)
  • Habit forming goods (elastic)
  • Different uses (inelastic)
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20
Q

Income elasticity of demand

YED

A

Measures how much the demand for a good changes with a change in real income

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21
Q

How to calculate YED

A

% change in quantity demanded of a good

DIVIDED BY

% change in real income

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22
Q

YEDs

A

Useful for:

Sales forecasting

  • change in income and affect on demand

Pricing policy

  • de/increase price

LOW YED = inferior goods produced

HIGH YED = normal goods produced

Useful for govt to know during booms and recessions

  • what policies to use and what to allocate
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23
Q

Cross elasticity of demand

XED

A

Measure of how the quantity demanded of a good responds to a change in price of another good

24
Q

How to calculate XED

A

% change in quantity demanded of good A

DIVIDED BY

% change in price of good B

25
Q

XEDs

A

Substitutes - positive

Complements - negative

Independent/Unrelated goods - XED of 0

26
Q

Supply?

A

The quantity of a good/service that producers supply to a market at a given price in a particular time

27
Q

Determinants of supply of g/s

A

Reason for upwards sloping supply curve

  • producers aim to maximise profit

All things being equal

  • increase price = increase in profit

which gives incentive to expand population
= increase in supply

Firms will only produce more if price increases more than the costs

28
Q

LEFT shift in supply

A

CHANGES TO THE COST IN PRODUCTION

  • increase in one or more costs of production will decrease producers profits

INDIRECT TAXES

  • on goods effectively increase costs for a producer
29
Q

RIGHT shift in supply

A

IMPROVEMENTS IN TECHNOLOGY

  • reduces costs of production and increased supply

CHANGES TO THE PRODUCTIVITY OF FACTORS OF PRODUCTION

  • increased production of factors of production means more output for a firm

NO. OF SUPPLIERS

  • an increase of suppliers in a market
30
Q

Joint supply?

A

Where the production of one good/service involves the production of another

If the price of a product increases, then supply of it and joint products will also increase

E.g. petrol increases

= the level of drilling oil increases

31
Q

Conditions of supply

A
  • costs of production
  • subsidies
  • taxes imposed
  • technical progress
32
Q

Price elasticity of supply

PES

A

Measure of how the quantity supplied of a good responds to a change in its price

33
Q

How to calculate PES

A

% change in quantity demanded

DIVIDED BY

% change in price

34
Q

PES graphs

A

(Insert)

35
Q

Factors determining PES

A

LENGTH OF PROD PERIOD

  • firms can convert raw materials into finished goods

= more elastic supply

AVAILABILITY OF SPARE CAPACITY

  • if firms have this and labour readily available

= production increases quickly in short run

36
Q

Factors affecting PES

A

PERIODS OF IMPROVEMENT

  • elastic supply
    as it’s easy to attract new workers if a firm wants to expand

PERISHABLE GOODS

  • inelastic supply
    as they cannot be stocked for too long

FIRMS WITH HIGH STOCK LEVELS

  • elastic supply
    as they can increase supply quickly if they want to

INDUSTRIES WITH MORE MOBILE FACTORS OF PRODUCTION

  • elastic supply
37
Q

High PES is important to firms

A

Improve elasticity of supply by:

  • flexible working patterns
  • use of latest tech
  • having spare production capacity
38
Q

Short run supply

A

It’s price INELASTIC

Over short periods of time, firms can find it difficult to switch production from one good to another

39
Q

Long run supply

A

All factors of production are variable, therefore the firm is able to increase its capacity

Supply is elastic as firms have longer time to react to changes in price and demand

40
Q

Market equilibrium?

A

Price and output are stable

41
Q

Disequilibrium?

A

There is excess demand/supply

42
Q

Excess supply?

A

When the quantity supplied to a market is greater than the quantity demanded

43
Q

Excess demand?

A

When the quantity demanded for a good/service is greater than the supply

44
Q

Elasticity’s effect of new equilibrium

A

Price ELASTIC demand/supply

  • greater impact on quantity

Price INELASTIC demand/supply

  • greater impact on price
45
Q

Competitive markets

A

When there is a large no. of buyers and sellers

No single producer/consumer can influence the allocation of resources of the market or its prices

46
Q

Assumption that consumers/producers act rationally

A

CONSUMERS AIM

  • maximise welfare by buying goods/services to maintain their quality of living

PRODUCERS AIM

  • to provide what consumers with what they want at the lowest prices to maximise their profit by selling the most to them
48
Q

Price mechanism?

A

Changes in demand/supply of a good/service

leads to a change in its price and the quantity bought/sold

Has 3 functions:

  • acts as an incentive to firms
  • acts as a signalling device
  • acts to ration scarce resources
48
Q

Advantages of Price Mechanism

A
  • resources will be allocated efficiently to satisfy needs/wants
  • it can operate without the cost of employing people to regulate it
  • consumers decide what the product is
  • minimum prices are kept as resources are used efficiently as possible
49
Q

Disadvantages of Price Mechanism

A
  • inequality in income
  • public goods won’t be produced
  • under-provision of merit goods
  • over-provision of demerit goods
  • people with limited skills suffer with unemployment or receive low wages
50
Q

Consumer surplus?

A

When they pay less for a good than the amount they’ve prepared to pay

E.g. they bring £10 but it’s £8

Consumer surplus = £2

51
Q

Producer surplus?

A

When they receive more for a product than the price they’re willing to accept

E.g. price is £15 but they would have happily sold it at £10

Producer surplus = £5

52
Q

CARDS LEFT TO DO:

A

Oil

Agriculture

Housing

Transport

for demand

53
Q

If a good has elastic demand:

A

Reduction in price

= increase in total revenue

Increase in price

(Vice Versa)

53
Q

If a good has inelastic demand:

A

Reduction in price

= reduction in total revenue

(Vice Versa)

53
Q

Market forces removing excess supply

A 
If price is set ABOVE eq 
☝🏽
Excess supply 
☝🏽 
More QS than QD
☝🏽
Prices fall
☝🏽
Supply contrasts, demand extends 
☝🏽 
Reach eq
54
Q

Market forces removing excess demand

A 
If price is BELOW eq
☝🏽
Excess demand 
☝🏽
Demand outweighs supply
☝🏽
Force price rise 
☝🏽
Demand contrasts, supply extends
☝🏽
Return to eq

AQA Economics (5 decks)

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