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Microeconomics > 3. Price Determination In A Competitive Market > Flashcards

3. Price Determination In A Competitive Market Flashcards

1
Q

What is a market?

A

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

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2
Q

What is a competitive market?

A

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

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3
Q

What is the equilibrium price?

A

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

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4
Q

What does demand refer to?

A

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

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5
Q

What is effective demand?

A

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

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6
Q

What does the Law of Demand state?

A

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.

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7
Q

What is the ‘assumption of ceteris paribus’?

A

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

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8
Q

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

A

Conditions of demand.

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9
Q

What are the conditions of demand?

A
  • Real disposable incomes
  • Tastes and preferences (fashions)
  • Population
  • Prices of substitute products
  • Prices of complementary products
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10
Q

What are real disposable incomes as a condition of demand?

A

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

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11
Q

What is taxation?

A

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

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12
Q

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

A

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.

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13
Q

What is population as a condition of demand?

A

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

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14
Q

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

A

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

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15
Q

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

A

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

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16
Q

What is a substitute?

A

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

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17
Q

What is a complement?

A

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

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18
Q

What is price elasticity of demand?

A

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

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19
Q

What is the formula for PED?

A

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

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20
Q

What value is PED when price is inelastic?

A

Between 0 and 1, ignoring the minus sign

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21
Q

What is the value of PED when price is elastic?

A

Greater that 1, ignoring the minus sign

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22
Q

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

A

Exactly 1, with a rectangular hyperbola curve

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23
Q

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

A

Exactly 0, with a vertical demand curve

24
Q

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

A

Value is infinity, with a horizontal curve

25
Q

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

A

Reduction in price, decrease in TR

26
Q

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

A

Reduction in price, decrease in TR

27
Q

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

A

Price increase, reduction in TR

28
Q

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

A

Price increase, increase in TR

29
Q

What are the determinents of price elasticity of demand?

A
  • Availability of close substitutes
  • % of income spent on the product
  • Nature of the product
  • Time period
  • Broad or specific market definition
30
Q

What is the availability of close substitutes?

A

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

31
Q

What is % change of income spent on the product?

A

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

32
Q

What is the nature of the product?

A

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

33
Q

What is time period?

A

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

34
Q

What is broad or specific market?

A

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

35
Q

What is income elasticity of demand (YED)?

A

Measures the responsiveness of demand to a change in real income

36
Q

What is the formula for YED?

A

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

37
Q

What is the value of YED when income is elastic?

A

Greater than +1

38
Q

What is the value of YED when income is inelastic?

A

Between 0 and +1

39
Q

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

A

Negative, less than 0

40
Q

What is cross elasticity of demand?

A

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

41
Q

What is the formula for XED?

A

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

42
Q

What is supply?

A

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

43
Q

What is the law of supply?

A

If price increases, quantity supplied will increase

44
Q

What are the conditions of supply?

A

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

45
Q

What is production costs as a condition of supply?

A

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

46
Q

What is productivity of labour as a condition of supply?

A

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

47
Q

What are taxes on businesses as conditions of supply?

A

Includes excise duties, VAT, and business rates

48
Q

What are production subsidies as conditions of supply?

A

Government grants to firms to encourage greater production

49
Q

What is technology as a condition of supply?

A

Improvements in technology may lead to increased productivity of firms

50
Q

What is price elasticity of supply?

A

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

51
Q

What is the formula for PES?

A

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

52
Q

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

A

There is a direct relationship between price and quantity supplied

53
Q

What is the value of PES when price is inelastic?

A

Between 0 and 1

54
Q

What is the value of PES when price is elastic?

A

Greater than 1

55
Q

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

A

Exactly 1

Microeconomics (3 decks)

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