2.Price determination in a competitive market

Question 1

Define supply.

Answer 1

The quantity of a good or service that firms are willing and able to sell at a given price.

Question 2

Define demand.

Answer 2

The quantity of a good or service that consumers are willing and able to buy at a given price.

Question 3

What is the equilibrium price?

Answer 3

The price at which planned demand for a good or service equals the planned supply.

Question 4

Describe the relationship between demand and price (law of demand).

Answer 4

When the price of a good or service falls, then demand increases.

Question 5

Describe movement of demand curve if demand increases.

Answer 5

A rightward shift of the demand curve.

Question 6

Describe movement of demand curve if demand decreases.

Answer 6

A leftward shift of the demand curve.

Question 7

What factors cause the demand curve to shift right?

Answer 7

The price of substitute goods (rise),
The price of complementary goods (fall),
Personal income (rise),
Tastes and fashion,
Population size (rise).

Question 8

Define a normal good.

Answer 8

A good for which demand increases as income increases.

Question 9

Define an inferior good.

Answer 9

A good for which demand decreases as income increases.

Question 10

Define elasticity.

Answer 10

The responsiveness of one variable causes by a change in another variable.

Question 11

Define price elasticity of demand, and its formula.

Answer 11

Measures consumers responsiveness to a change in a goods price. (Always a negative number).
PED=%change in quantity demanded / %change in price.

Question 12

Define income elasticity of demand, and its formula.

Answer 12

Measures how demand responds to a change in income.

YED=%change in quantity demanded / %change in income.

Question 13

Define cross elasticity of demand.

Answer 13

Measures how the demand for one good responds to a change in price of another good.

Question 14

Define the five types of demand.

Answer 14

Effective demand- the willingness and ability to buy a good or service.
Latent demand- the willingness but inability to buy a good or service.
Composite demand- the demand for a good which has two or more uses.
Joint demand- the demand for two or more complementary goods satisfy the same want.
Derived demand- the demand for one good resulting from the demand for an intermediate good.

Question 15

3 Factors affecting price elasticity of demand.

Answer 15

Substitutability- If a substitute good exists, the consumers respond to a change in price.
Percentage of income- If it is a large percentage then consumers respond to a change in price.
Necessities or luxuries- If good is a necessity then consumer will not respond to price.

Question 16

If a goods PED=0, how elastic will the good be?

Answer 16

The good is perfectly inelastic, because the demand of the good does not respond to a change in price. (vertical curve).

Question 17

If a goods PED is

Answer 17

The good is inelastic as it has a very small responsiveness to a change in price.

Question 18

If a goods PED is >1, how elastic will the good be?

Answer 18

The good is elastic, because is the demand for the good responds to a change in the goods price. (horizontal curve).

Question 19

What is the income elasticity of demand for a normal good?

Answer 19

YED is positive because as incomes rise, the demand for the good rises.

Question 20

What is the income elasticity of demand for an inferior good?

Answer 20

YED is negative for an inferior good, because as incomes rise the demand for the good falls.

Question 21

What is the cross elasticity of demand for substitute goods?

Answer 21

XED is positive because if the price of good A increases then the demand for good B will increase.

Question 22

What is the cross elasticity of demand for complementary goods?

Answer 22

XED is negative because if the price of good A rises then the demand for good B will fall.

Question 23

Describe the relationship between supply and price.

Answer 23

As quantity supplied increases, the price increases too.

Question 24

Define profit.

Answer 24

The difference between total sales revenue and total costs of production.

Question 25

Factors which affect the supply curve.

Answer 25

Costs of production:
-wages,
-raw materials,
-energy costs,
-cost of borrowing.
Technical progress
Government taxes or subsidies.

Question 26

Describe movement of the supply curve if supply increases.

Answer 26

The supply curve will shift left.

Question 27

Describe movement of the supply curve if supply decreases.

Answer 27

The supply curve will shift right.

Question 28

Define price elasticity of supply, and its formula.

Answer 28

Measures the change in the supply of a good in response to an initial change in price. (always positive).
PES=% change in quantity supplied / %change in price.

Question 29

Factors affecting price elasticity of supply.

Answer 29

Length of production process (shorter more elastic),
Ease of accumulating stock, (can increase supply quickly)
Number of firms in the market (larger the more elastic).

Question 30

Define excess supply and the result on the price of the good.

Answer 30

Excess supply is when planned demand

Question 31

Define excess demand and the result on the price of the good.

Answer 31

Excess demand is when planned demand>planned supply. This causes prices to rise.

Question 32

Define joint supply.

Answer 32

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

Question 33

Define competing supply

Answer 33

When one raw materials is used to produce good A so cannot be used to produce good B.

Question 34

In joint supply, if the demand for good A increases, what happens to the supply of good B?

Answer 34

The supply of good B will increase.