2 - Price Determination , Price Elasticity of Demand , Price Elasticity of Supply

Question 1

What is equilibrium price

Answer 1

The price where the quantity demanded and the quantity supplied are equal.

Question 2

How does equilibrium price affect workers?

Answer 2

At the equilibrium price, sellers will be satisfied with the rate/quantity of sales
At the equilibrium price, buyers are satisfied that the product provides benefits worth paying for

Question 3

What is market clearing price?

Answer 3

At this point the price is called the market clearing price
This is the price at which sellers are clearing (selling) their stock at an acceptable rate

Question 4

What is Market Disequilibrium?

Answer 4

Excess demand occurs when the demand is greater than the supply
It can occur when prices are too low or when demand is so high that supply cannot keep up with it

Question 5

What is the Market response to disequilibrium?

Answer 5

This market is in disequilibrium
Sellers are frustrated that products are selling so quickly at a price that is obviously too low
Some buyers are frustrated as they will not be able to purchase the product
Sellers realise they can increase prices & generate more revenue and profits
Sellers gradually raise prices
This causes a contraction in QD as some buyers no longer desire the good/service at a higher price
This causes an extension in QS as other sellers are more incentivised to supply at higher price

Question 6

What is the Law of Demand?

Answer 6

The law of demand states the higher the price of a good the lower the demand the lower the price of a good the higher the demand or the quanitity purchased varies inversely with the
price

Question 7

How is price elasticity of demand calculated?

Answer 7

PED = percentage change in quantity demanded / Percentage change in price.

Question 8

What is Price elasticity of demand?

Answer 8

A measure the extend to which the quantity demanded changes when the price of the product changes?

Question 9

What is Perfectly inelastic demand?

Answer 9

Quantity demanded does not change at all
When prices changes

Question 10

What is Elastic demand?

Answer 10

The responsiveness of quanitity
Demanded is proportionally more than the change in
Price ( PED figure greater than 1)

Question 11

What is Perfectly Elastic Demand?

Answer 11

The
Percentage change in quanitity demanded
Is infinite even the percentage change in
Price is zero

Question 12

What is Inelastic Demand?

Answer 12

the responsiveness of the
Quantity demanded is proportionally less than the
Change in price ( PED figure between 0 and 1)

Question 13

What is Unitary elastic demand?

Answer 13

the responsiveness of the
Quanitity demanded changes is the same proportion as
The change in price

Question 14

What do the elasticity of demand curves look like?

Answer 14

Question 15

Why might people continue to buy a product even if the price is still increasing?

Answer 15

If the product is a necessity tend to have inelastic demand as people cannot cut back significantly on their use, even if their price rises .
Addaction you cant stop buying a product if your addicted no matter the price
If its health related to help you to live inelastic demand
Number and availability of substitutes if there are no close substitutes available, demand will probably be inelastic as there are no other different goods.
Time- in the short term if price changes, consumers may not have enough time to find alternatives
Proportion of income- goods which take up small proportion of peoples income tend to have inelastic demand because increase in price involves consumers paying a little bit more they may not notice the change in price

Question 16

What are the factors effecting changes in price?

Answer 16

Availability of substitutes: good availability of substitutes results in a higher value of PED (relatively elastic)
Addictiveness of the product: addictiveness turns products into necessities resulting in a low value of PED (relatively inelastic)
Price of product as a proportion of income: the lower the proportion of income the price represents, the lower the PED value will be. Consumers are less responsive to price changes on cheap products (relatively inelastic)
Time period: In the short term, consumers are less responsive to price increases resulting in a low value of PED (relatively inelastic). Over a longer time period consumers may feel the price increase more and will then look for substitutes resulting in a higher value of PED (relatively elastic)

Question 17

What is revenue?

Answer 17

Revenue is the amount of money a firm receives from selling its goods/services
Total revenue = price x quantity

Question 18

How should firms price their products?

Answer 18

The total revenue rule states that in order to maximise revenue, firms should increase the price of products that are inelastic in demand & decrease prices on products that are elastic in demand

Question 19

Why should firms have knowledge of PED?

Answer 19

Knowledge of PED is important to firms seeking to maximise their revenue
If their product is price inelastic in demand, they should raise their prices
If price elastic in demand, then they should lower their prices
Firms can choose to use price discrimination to maximise their revenue i.e. lower prices for certain segments & higher prices for others

Question 20

Why should the gov have knowledge of PED?

Answer 20

Knowledge of PED is important to Governments with regard to taxation and subsidies
If they tax price inelastic in demand products, they can raise tax revenue without harming firms too much
Consumers are less responsive to price changes so firms will pass on the tax to the consumer
If Governments subsidise price elastic in demand products, there can be a greater than proportional increase in demand

Question 21

What is the Law of Supply?

Answer 21

The law of supply is as the price increases supply increases direct and positive relationship?

Question 22

What is price elasticity of supply?

Answer 22

A measure to the extent to which the quantity supplied changes when the price of a product changes

Question 23

What is the calculation of Price elasticity of supply?

Answer 23

PES = percentage change in quantity supplied / Percentage change in price

Question 24

What is Perfectly inelastic supply?

Answer 24

Quantity SUPPLY does not change at all
When prices changes

Question 25

What is elastic supply?

Answer 25

the responsiveness of quanitity
supply is proportionally more than the change in
Price (PES figure greater than 1)

Question 26

What is perfectly elastic supply?

Answer 26

the
Percentage change in quanitity supplied
Is infinite even the percentage change in
Price is zero

Question 27

What is Inelastic supply?

Answer 27

The responsiveness of the
Quantity supplied is proportionally less than the
Change in price(PES figure between 0 and 1)

Question 28

What is Unitary elastic supply?

Answer 28

The responsiveness of the
Quanitity supplied changes is the same proportion as
The change in price

Question 29

What factors affect the levels of supply in the economy

Answer 29

Mobility of the factors of production: if producers can quickly switch their resources between products, then the PES will be more elastic
Availability of raw materials: if raw materials are scarce then PES will be low (inelastic). If they are abundant, PES will be higher (elastic)
Ability to store goods: if products can be easily stored then PES will be higher (elastic) as producers can quickly increase supply (for example, tinned food products). An inability to store products results in lower PES (inelastic)
Spare capacity: if prices increase for a product & there is capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic
Time period: In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g., avocados). However, in the long run they can change any of their factors of production so as to produce more

Question 30

What is the significance of PES for producers?

Answer 30

If producers have a high PES (elastic) then they are able to respond to increases in price very quickly
This is desirable as it means producers can increase revenues & profits if they can supply more
Firms can increase their PES by:
Creating more spare capacity on their production lines
Maintaining larger inventories
Using more modern technology If producers have a low PES (inelastic) then they are less able to respond to increases in price
This shortage in supply will mean that prices continue to rise, possibly causing inflation in the economy

Question 31

What is the significance of PES for the gov?

Answer 31

Governments are very interested in the PES of key markets in the economy as they want to ensure that these markets can respond quickly to rising demand