2:Price determination in a competitive market

Question 1

Competitive market

Answer 1

A market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market.

Question 2

Equilibrium price

Answer 2

The price at which planned demand for a good/service exactly equals planned supply.

Question 3

Supply

Answer 3

Quantity of a good/service that firms are willing and able to sell at given prices in a given period of time/

Question 4

Demand

Answer 4

Quantity of a good/service that consumers are willing and able yo buy at given prices in a given period of time

Question 5

Effective demand

Answer 5

The desire of a good/service backed by an ability to pay

Question 6

Market demand

Answer 6

Quantity of a good/service that all the consumers in a market are willing and able to buy at different market prices.

Question 7

Condition of demand

Answer 7

A determinant of demand, other than the good’s own price, that fixes the position of the demand curve

Question 8

Normal good

Answer 8

Demand increases as income rises and demand decreases as income falls

Question 9

Inferior good

Answer 9

Demand decreases as income rises and demand increases as income falls

Question 10

Elasticity

Answer 10

The proportionate responsiveness of a second variable to an initial change in the first variable

Question 11

Price elasticity of demand

Answer 11

Measures extent to which the demand for a good changes in response to a change in the price of that good
PED=Percentage change in quantity demanded divided by percentage change in price

Question 12

Income elasticity of demand

Answer 12

Measures extent to which demand for a good changed in response to a change in income
IED=Percentage change in quantity demanded divided by percentage change in income

Question 13

Cross-elasticity of demand

Answer 13

Measures the extent to which the demand for a good changes in response to a change in the price of another good
CED=Percentage change in quantity demanded divided by percentage change in price of other good

Question 14

Market supply

Answer 14

Quantity of good/service that all firms plan to sell at given prices in a given period of time

Question 15

Profit

Answer 15

Difference between total sales revenue and total costs of production

Question 16

Total revenue

Answer 16

Money a firm receives from selling its output

TR=Price X quantity sold

Question 17

Conditions of supply

Answer 17

Determinants of supply, other than the good’s own price, that fix the position of the supply curve

Question 18

Price elasticity of supply

Answer 18

Measures extent to which the supply of a good changes in response to a change in the price of that good

Question 19

Equilibrium

Answer 19

A state of rest or balance between opposing forces

Question 20

Disequilibrium

Answer 20

A situation in a market when there’s excess supply or excess demand

Question 21

Market equilibrium

Answer 21

When planned demand =planned supply and the demand curve crosses the supply curve. No excess demand or excess supply in the market.

Question 22

Market disequilibrium

Answer 22

Exists at any price other than the equilibrium price. Either excess demand or excess supply exists in the market. Excess demand causes price to rise until a new equilibrium is established. Excess supply causes market price to fall until equilibrium is achieved.

Question 23

Excess supply

Answer 23

When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price

Question 24

Excess demand

Answer 24

When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price

Question 25

Joint supply

Answer 25

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

Question 26

Competing supply

Answer 26

When raw materials are used to produce one good they can’t be used to produce another good

Question 27

Complementary good

Answer 27

A good in joint demand, or a good which is demanded at the same time as the other good

Question 28

Substitute good

Answer 28

A good in competing demand, namely a good that can be used in place of the other good

Question 29

Composite demand

Answer 29

Demand for a good which has more than one use

Question 30

Derived demand

Answer 30

Demand for a good which is an input into the production of another good

Question 31

Merit good

Answer 31

A good which when consumed leads to benefits which other people enjoy, or a good for which the long-term benefit of consumption exceeds the short-term benefit enjoyed by the person consuming the merit good.