3. Price determination in a competitive market - micro

Question 1

Market

Answer 1

A voluntary meeting of buyers and sellers with exchange taking place

Question 2

Demand

Answer 2

The quantity of a good or service that consumers are willing and able to buy at given prices in a period of time

Question 3

Supply

Answer 3

The quantity of goods and services that producers are willing and able to sell at given prices in a given period of time

Question 4

Competitive markets

Answer 4

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

Question 5

Ruling market price
(Equilibrium price)

Answer 5

The price at which planned demand equals planned supply

Question 6

Effective demand

Answer 6

The desire for a good or service backed by the ability to pay

Question 7

Substitute goods

Answer 7

Alternative goods that could be used for the same purpose

Question 8

Complementary goods

Answer 8

When two goods are complements, they experience joint demand

Question 9

Normal good

Answer 9

A good which demand increases as income rises and demand decrease as income falls

Question 10

Inferior good

Answer 10

A good for which demand decreases as income rises and demand increases when income falls

Question 11

Elasticity

Answer 11

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

Question 12

Price elasticity of demand (PED)

Answer 12

Measures the extent to which demand for a good changes in response to change in price of that good.

Question 13

PED = infinity

Answer 13

Horizontal demand curve
Perfectly elastic demand

Question 14

PED = zero

Answer 14

Vertical demand curve
Perfectly inelastic demand

Question 15

PED>1

Answer 15

Sloping down demand curve
Price elastic

Question 16

PED<1

Answer 16

Steep sloping down demand curve
Price inelastic

Question 17

Factors determining price elasticity of demand

Answer 17

-substitutability
-percentage of income
-Necessities or luxuries
-the ‘width’ of the market definition
-time

Question 18

Short run

Answer 18

The time period in which at least one factor of production is fixed and cannot be varied

Question 19

Long run

Answer 19

The time period in which no factors of production are fixed and in which all factors of production can be varied

Question 20

Income elasticity of demand

Answer 20

Measures extent to which the demand for a good changes in response to a change in income
Always negative for an inferior good and positive for a normal good

Question 21

YED>1

Answer 21

Superior goods or luxuries
Income elastic

Question 22

0 < YED > 1

Answer 22

Necessities
Income inelastic

Question 23

Cross-elasticity of demand

Answer 23

Measures the extent to which the demand for a good changes in response to a change in price of another good.

Question 24

XED possible natures of relationships between goods

Answer 24

• complementary goods (joint demand)
• substitutes (competing demand)
• an absence if discernible demand relationship

Question 25

XED of complimentary goods

Answer 25

Negative cross elasticities of demand

Question 26

XED of substitute goods

Answer 26

Positive cross elasticities of demand

Question 27

XED of goods with no discernible demand (no relationship)

Answer 27

Zero cross elasticity of demand

Question 28

Profit

Answer 28

The difference between total sales revenue and total cost of production

Question 29

Total revenue

Answer 29

All the money received by a firm from selling its total output

Question 30

Conditions of supply

Answer 30

Costs of production including - wage costs - raw material costs - energy costs - costs of borrowing Technical progress Taxes imposed on firms Subsidies granted by government to firms

Question 31

Price elasticity of supply

Answer 31

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

Question 32

PES = infinity

Answer 32

Horizontal supply curve Perfectly elastic supply

Question 33

PES>1

Answer 33

Shallow sloping supply curve Elastic supply

Question 34

PES =1

Answer 34

Unit elastic supply

Question 35

PES<1

Answer 35

Steep sloping supply curve Inelastic supply

Question 36

PES = 0

Answer 36

Vertical supply curve Completely inelastic supply

Question 37

Factors determining PES

Answer 37

Length of production period Availability of spare capacity Ease of accumulating stocks Ease of switching between alternative methods of production Number of firms in the market and the ease of entering the market Time (LR/SR supply, market period supply)

Question 38

Equilibrium

Answer 38

A state of rest or balance between opposing forces

Question 39

Disequilibrium

Answer 39

A situation in which opposing forces are out of balance

Question 40

Excess supply

Answer 40

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

Question 41

Excess demand

Answer 41

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

Question 42

Joint supply

Answer 42

When one good is produced another good is also produced from the same raw materials, perhaps as a by-product

Question 43

Composite demand

Answer 43

Demand for a good which has more than one use, which means that in increase in demand foe that one use of the good reduces the supply of good for an alternative use. Related to concept of competing supply

Question 44

Derived demand

Answer 44

Demand for a good or factor of production wanted not for its own sake, but as a consequence of the demand for something else.