2.1 - Introduction to competitive markets

Question 1

SHIFT/MOVEMENT

Answer 1

Shift - when price doesnt change but quantity changes
movement - when price changes and so does quantity

Question 2

Market

Answer 2

Market is any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange.

Question 3

Product/Resource markets

Answer 3

Product - Goods and services
Resource - (Factors of production) are sold in resource (factor) markets.

Question 4

Market Power

Answer 4

Control a seller may have over price. If the price of the product it sells. The greater the market power, the greater is the control over price. On the other hand, the greater the degree of competition between sellers, the smaller the market power and weaker is their control over the price.

Question 5

Competitive Markets

Answer 5

Composed of large numbers of sellers and buyers acting independently, so that no one individual seller or small group of sellers has the ability to control the price of the product sold.

Question 6

Demand

Answer 6

The demand of an individual consumer indicates the various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.

Question 7

Willing

Answer 7

willing means the consumer wants to buy the good:
‘able’ means that the consumer can afford to buy it.

Willing doesn’t increase the demand

Question 8

Ceteris Paribus

Answer 8

All things other than price that can affect how much the consumer is willing and able to buy are assumed to be constant and unchanging.

Question 9

The law of demand

Answer 9

As the price of good falls, the quantity of good demanded increases. ‘Negative’ or ‘indirect’ relationship

Question 10

Market Demand

Answer 10

Sum of all individual demands for a good.

Question 11

Rightward shift

Answer 11

Indicates that more is demanded for a given price –> increase in demand

Question 12

Leftward Shift

Answer 12

Indicates that less is demanded for a given price. Decrease in demand.

Question 13

Price constant, demand changes (SHIFT)

Answer 13

When price remains constant, even though there is a change in the quantity demanded then in that case there is a shift. The rightward shift is when demand increases, leftward shift is when demand decreases.

Question 14

Non-price determinants
1. Income in case of normal goods
2. Income in case of inferior goods
3. Preferences and tastes
4. Prices of substitute goods

Answer 14

Income in case of normal goods
When income increases the case of normal goods. If income increases, rightward shift. If income decreases, leftward shift.

Income in the case of inferior goods
While goods are normal, there are some goods where the demand falls as consumer income increases:
The good is then an inferior good (the demand for good varies inversely with income).
Example: second hand cars, clothes, bus tickets.

Increase in income leads to a leftward shift in demand curve and a decrease in income produces a rightward shift.

Question 15

Preferences and tastes

Answer 15

change in favour of product –> demand increases, shift to right

change against product –> demand decreases, shift to left

Question 16

Prices of substitute goods

Answer 16

Directly related (Coca Cola price increases, Pepsi demand increases)

Question 17

Prices of complimentary goods

Answer 17

Two goods are complements (complementary goods) if they tend to be used together. An example of complementary goods is computer and computer software.

So if the price of game consoles decreases then demand for video game increases.

Question 18

The number of consumers/increase in population

Answer 18

if the number of consumers increases, demand increases, shift towards right.

If the number of consumers decreases, demand decreases, shift towards left.

Question 19

Movements along a demand curve shifts off the demand curve.

Answer 19

Price changes it leads to a movement along the demand curve.

Price remains same then its a shift.

Question 20

Assumptions underlying the law of demand

Answer 20

The law of diminishing marginal utility –> negative relationship between price and quantity demanded, or law of demand.

Utility - satisfaction of consumers

Question 21

Total Utility and Marginal Utility

Answer 21

Total Utility - total satisfaction that consumers get from consuming something.
Marginal utility - is the extra satisfaction that consumers receive from consuming one more unit of a good.

Question 22

Marginal Utility

Answer 22

Keeps decreasing and at some point may even become negative, meaning total utility starts to fall. based on idea that satisfaction consumers get from consuming more and more units of a good decreases.

Question 23

Law of diminishing marginal utility

Answer 23

Consumption of a good increases, marginal utility or extra utility receives, decreases with each additional unit consumed. Shows law of demand which means that the consumer will only be ready to buy each additional unit of a good if price falls.

Question 24

Substitution effect

Answer 24

If the price of a good falls the consumer substitutes (buys more) of the now less expensive good. Therefore, quantity demanded increases. Always a negative relationship between price and quantity demanded as a result of the substitution effect: as price falls, the quantity of the good demanded increases; as price increases, quantity demanded falls

Question 25

Income effect

Answer 25

If the prices fall, the purchasing power of the customer increases. Which means the pencil that used to cost $4 now costs $3. Hence, more can be bought with the same money. Income is the same as ‘Real Income’. Purchasing power increases as prices fall, and It decreases as prices rise.