3 Price Determination in a Competitive Market

Question 1

what is demand

Answer 1

is the quantity of a good or service that consumers are able and willing to
buy at a given price during a given period of time.

Question 2

what is the law of demand

Answer 2

there is an inverse relationship between price and quantity as price increases QD decreases and vice versa

Question 3

what is the income affect

Answer 3

as price increases it decreases purchasing power of our income and therefore less able to buy the same quantity of goods and services so demand contracts

Question 4

what is the substitution effect

Answer 4

as price increases of goods become less price competitive so we switch our goods to buying other goods and services

Question 5

does price shift demand curve

Answer 5

NO

Question 6

what are non price factors can shift demand curve
(PASIFIC)

Answer 6

Population
Advertising
Substitue prices
Income
Fashion/ trends
Intrest rates
Complement prices

Question 7

Substitue prices

Answer 7

If the price of the substitute falls, the quantity demanded of the original good
will fall because consumers will switch to the cheaper option

Question 8

Complement prices

Answer 8

A complement goes with another good, such as strawberries and cream. If the price of strawberries increases, the demand for cream will fall because fewer people will be buying strawberries, and hence fewer people will be buying cream

Question 9

advertising

Answer 9

good advertising increases brand loyalty and willingness to buy product increasing demand

Question 10

Income

Answer 10

If consumers have more disposable income, they are able to afford
more goods, so demand increases.

Consumers generally spend more as they perceive their wealth to
increase. Likewise, consumers spend less when they believe their wealth will
decrease.

Question 11

Fashion/trends

Answer 11

The demand curve will also shift if consumer tastes
change.

• For example, the demand for physical books might fall, if consumers
  start preferring to read e-books.

Question 12

intrest rates

Answer 12

if intrest rate go down cheaper to borrow increasing demand for goods and services such as housing

if intrest rates increases its more expensive to borrow so QD will shift inwards

Question 13

why is The demand curve is downward sloping

Answer 13

The demand curve is downward sloping showing the inverse relationship between
price and quantity.

Question 14

what is The law of diminishing marginal utility

Answer 14

The law of diminishing marginal utility states that as an extra unit of the good is
consumed, the marginal utility, i.e. the benefit derived from consuming the good,
falls

Question 15

what is the price elasticity of demand

Answer 15

The price elasticity of demand measures the responsiveness of a change in demand to a change in price.

Question 16

what is the formula for PED

Answer 16

%change in QD / % change P

Question 16

how do you work out % change

Answer 16

diffrence (new-old)/ original X100

Question 17

what is a price elastic good

Answer 17

A price elastic good is very responsive to a change in price. In other words, the
change in price leads to an even bigger change in demand.

Question 18

what is a price inelastic good

Answer 18

A price inelastic good has a demand that is relatively unresponsive to a change in
price

Question 19

what is A unitary elastic good

Answer 19

A unitary elastic good has a change in demand which is equal to the change in price.
PED = 1

Question 20

what is A perfectly inelastic good

Answer 20

has a demand which does not change when price changes.
PED = 0.

Question 21

what is a A perfectly elastic good

Answer 21

A perfectly elastic good has a demand which falls to zero when price changes. PED = infinity.

Question 22

what factors affects PED
( SPLAT)

Answer 22

substitutes , percentage of income, Luxury/ necesisty , addictive or habit forming, Time period

Question 23

substitues

Answer 23

if the good has several substitutes, such as Android phones instead of iPhones, then
the demand is more price elastic.

The elasticity can also change within markets.

Question 24

what is an example of this

Answer 24

For example, the market for bread is less elastic than the market for white bread. This is because there are fewer substitutes for bread in general, but there are several substitutes for white bread. Hence, white bread is more price elastic. The closer and more available the substitutes are, the more price elastic the demand.

Question 25

how can subustitues be affected by short run and long run

Answer 25

Elasticity also changes in the long and short run. In the long run, consumers have
time to respond and find a substitute, so demand becomes more price elastic. In the
short run, consumers do not have this time, so demand is more inelastic

Question 26

luxury or necessity

Answer 26

A necessary good, such as bread or electricity, will have a relatively inelastic demand.In other words, even if the price increases significantly, consumers will still demand bread and electricity, because they need it. Luxury goods, such as holidays, are more elastic. If the price of flights increases, the demand is likely to fall significantly

Question 27

adictiveness

Answer 27

The demand for goods such as cigarettes is not sensitive to a change in price because consumers become addicted to them, and therefore continue demanding the cigarettes, even if the price increases.

Question 28

percentage of income

Answer 28

If the good only takes up a small proportion of income, such as a magazine which increases in price from £1.50 to £2, demand is likely to be relatively price inelastic. Ifthe good takes up a significant proportion of income, such as a car which increases in price from £15,000 to £20,000, the demand is likely to be more price elastic

Question 29

time period

Answer 29

During peak times, such as 9am and 5pm for trains, the demand for tickets is more
price inelastic.

Question 30

Total revenue

Answer 30

PXQ

Question 31

how can a firm increase total revenue

Answer 31

If a good has an inelastic demand, the firm can raise its price, and quantity sold will
not fall significantly. This will increase total revenue

Question 32

how can a firm decrease total revenue

Answer 32

If a good has an elastic demand and the firm raises its price, quantity sold will fall.
This will reduce total revenue.

Question 33

Income elasticity of demand

Answer 33

measures the responsiveness of a change in demand to a change in income.

Question 34

the formula for YED

Answer 34

%chang in QD/ % change in Y

Question 35

what are inferior goods

Answer 35

Inferior goods are those which see a fall in demand as income increases

Question 36

an example of inderior goods

Answer 36

the ‘value’ options at supermarkets could be seen as inferior. As income
increases, consumers switch to branded goods. YED < 0.

Answer 37

With normal goods, demand increases as income increases. YED >0.

Answer 38

With luxury goods, an increase in income causes an even bigger increase in demand.
YED > 1.

Question 39

what is cross elasticity of Demand
(XED)

Answer 39

measures the responsiveness of a change in demand of one good, X, to a change in price of another good, Y

Question 40

what is the formula for XED

Answer 40

% change in QD of X/ % change of Y