3. Price Determination In A Competitive Market

Question 1

What is a market?

Answer 1

A situation where buyers and sellers come together to engage in trade.

Question 2

What is a competitive market?

Answer 2

A situation where there are a range number of potential buyers and sellers with abundant information about the market.

Question 3

What is the equilibrium price?

Answer 3

The price at which the planned demand of consumers equals the planned supply of firms.

Question 4

What does demand refer to?

Answer 4

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

Question 5

What is effective demand?

Answer 5

Consumers desire to buy a good, backed up by the ability to pay.

Question 6

What does the Law of Demand state?

Answer 6

That as the price of a good or service falls, the quantity demanded increases, this is an inverse relationship between price and quantity demanded of a good or service.

Question 7

What is the ‘assumption of ceteris paribus’?

Answer 7

Assuming that all other possible determinants of demand are held constant.

Question 8

What factors lead you to a shift in the demand curve?

Answer 8

Conditions of demand.

Question 9

What are the conditions of demand?

Answer 9

• Real disposable incomes
• Tastes and preferences (fashions)
• Population
• Prices of substitute products
• Prices of complementary products

Question 10

What are real disposable incomes as a condition of demand?

Answer 10

The incomes of individuals after the effects of inflation, taxation, and benefits are taken into account.

Question 11

What is taxation?

Answer 11

A charge placed by the government on various forms of economic activity. Most taxes are on forms of income and types of spending.

Question 12

What are tastes and preferences (fashions) as a condition of demand?

Answer 12

The popularity of goods and services is often influenced by changes in society’s preferences and may be influenced by media, advertising, and technological change.

Question 13

What is population as a condition of demand?

Answer 13

The size, age, and gender composition of the population will affect the market size for many products.

Question 14

What are prices of substitute products as a condition of demand?

Answer 14

Substitute products are those in competitive demand that may be seen as close alternatives to a particular good or service.

Question 15

What are prices of complementary products as a condition of demand?

Answer 15

Complementary products are those in joint demand, ie. Demanded together with other goods or services.

Question 16

What is a substitute?

Answer 16

A good that may be consumed as an alternative to another good.

Question 17

What is a complement?

Answer 17

A good that tends to be consumed together with another good.

Question 18

What is price elasticity of demand?

Answer 18

The responsiveness of quantity demanded of a good to a change in price

Question 19

What is the formula for PED?

Answer 19

PED = % change in quantity demanded / % change in price

Question 20

What value is PED when price is inelastic?

Answer 20

Between 0 and 1, ignoring the minus sign

Question 21

What is the value of PED when price is elastic?

Answer 21

Greater that 1, ignoring the minus sign

Question 22

What is the value of PED when demand is unitary elastic?

Answer 22

Exactly 1, with a rectangular hyperbola curve

Question 23

What is the value of PED when demand in perfectly inelastic?

Answer 23

Exactly 0, with a vertical demand curve

Question 24

What is the value of PED when demand is perfectly elastic?

Answer 24

Value is infinity, with a horizontal curve

Question 25

What happens to total revenue when price is elastic, reduction?

Answer 25

Reduction in price, decrease in TR

Question 26

What happens to total revenue when price is inelastic, reduction?

Answer 26

Reduction in price, decrease in TR

Question 27

What happens to total revenue when price is elastic, increase?

Answer 27

Price increase, reduction in TR

Question 28

What happens to total revenue when price is inelastic, increase?

Answer 28

Price increase, increase in TR

Question 29

What are the determinents of price elasticity of demand?

Answer 29

- Availability of close substitutes - % of income spent on the product - Nature of the product - Time period - Broad or specific market definition

Question 30

What is the availability of close substitutes?

Answer 30

If a close substitute exists, an increase in one products price will increase the demand for the substitute, making the demand for the product more elastic. Fewer substitutes, more inelastic

Question 31

What is % change of income spent on the product?

Answer 31

If a product accounts for a large portion of a persons disposable income, demand for the product will be relatively price elastic

Question 32

What is the nature of the product?

Answer 32

If it is seen as a necessity, or has addictive qualities, demand will tend to be price inelastic

Question 33

What is time period?

Answer 33

The longer the time period following a price change, the easier it is for a consumer to adjust their spending patterns or research for alternatives, demand will be more price inelastic

Question 34

What is broad or specific market?

Answer 34

A broad market category is likely to have a price inelastic demand, a specific market is more likely to have a price elastic demand

Question 35

What is income elasticity of demand (YED)?

Answer 35

Measures the responsiveness of demand to a change in real income

Question 36

What is the formula for YED?

Answer 36

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

Question 37

What is the value of YED when income is elastic?

Answer 37

Greater than +1

Question 38

What is the value of YED when income is inelastic?

Answer 38

Between 0 and +1

Question 39

What is the value of YED when income is negative elasticity?

Answer 39

Negative, less than 0

Question 40

What is cross elasticity of demand?

Answer 40

Measures the responsiveness of the demand for a product following a change in price of another product

Question 41

What is the formula for XED?

Answer 41

XED = % change in quantity demanded by product A / % change in price of product B

Question 42

What is supply?

Answer 42

The quantity for a good or service that firms plan to sell at given prices in a particular period of time

Question 43

What is the law of supply?

Answer 43

If price increases, quantity supplied will increase

Question 44

What are the conditions of supply?

Answer 44

Factors other than price that lead to change in position of the supply curve: - Production costs - Productivity of labour - Taxes on businesses - Production subsidies - Technology

Question 45

What is production costs as a condition of supply?

Answer 45

Includes wage costs, raw material costs, energy costs, building rent, and interest on borrowing

Question 46

What is productivity of labour as a condition of supply?

Answer 46

Refers to the output per worker per hour, this is affected buy the amount of training offered, and quality of capital equipment used by workers

Question 47

What are taxes on businesses as conditions of supply?

Answer 47

Includes excise duties, VAT, and business rates

Question 48

What are production subsidies as conditions of supply?

Answer 48

Government grants to firms to encourage greater production

Question 49

What is technology as a condition of supply?

Answer 49

Improvements in technology may lead to increased productivity of firms

Question 50

What is price elasticity of supply?

Answer 50

Measures the responsiveness of the quantity supplied of a good or service to a change in price

Question 51

What is the formula for PES?

Answer 51

PES = % change in quantity supplied / % change in price

Question 52

Why will price elasticity of supply always have a positive value?

Answer 52

There is a direct relationship between price and quantity supplied

Question 53

What is the value of PES when price is inelastic?

Answer 53

Between 0 and 1

Question 54

What is the value of PES when price is elastic?

Answer 54

Greater than 1

Question 55

What is the value of PES when price is unitary elastic?

Answer 55

Exactly 1