3 Price Determination in a Competitive Market

Question 1

what is supply

Answer 1

the quantity of a good or service that a producer is able and willing to
supply at a given price during a given period of time

Question 2

Supply curves are upward sloping because ?

Answer 2

1) If price increases, it is more profitable for firms to supply the good, so supply
increases.
o High prices encourage new firms to enter the market, because it seems
profitable, so supply increases.

o With larger outputs, firm’s costs increase, so they need to charge a higher
price to cover the costs

Question 3

what is the law of supply

Answer 3

there is a direct relationship between quantity and price. as price increases , Qs increases and vice versa

Question 4

what are non price factors that shift the supply curve

Answer 4

productivity, indirect taxes, number of firms , technology , subsidies , cost of production

Question 5

productivity

Answer 5

Higher productivity causes an outward shift in supply, because average costs for the firm fall.

Question 6

indirect taxes

Answer 6

. Inward shift in supply

Question 7

the number of firms

Answer 7

The more firms there are, the larger the supply

Question 8

Technology

Answer 8

More advanced the technology causes an outward shift in supply

Question 9

subsidies

Answer 9

Subsidies cause an outward shift in supply.

Question 10

weather

Answer 10

This is particularly for agricultural produce. Favourable conditions will increase supply.

Question 11

cost of production

Answer 11

if costs of production fall, the firm can afford to supply more. If costs rise, such as with higher wages, there will be an inward
shift in supply.

depreciation in the exchange rate will increase the cost of imports, which will cause an inward shift in supply

Question 12

what is PES

Answer 12

The price elasticity of supply is the responsiveness of a change in supply to a change in price

Question 13

what is the formula for PES

Answer 13

% change in QS/ % change P

Answer 14

If supply is elastic, firms can increase supply quickly at little cost PES is >1.

Answer 15

If supply is inelastic, an increase in supply will be expensive for firms and take a long
time PES is >1.

Answer 16

supply has PES = 0. Supply is fixed, so if there is a change in demand, it cannot be
met easily

Question 17

,

Answer 17

Supply is perfectly elastic when PES = infinity. Any quantity demanded can be met without changing price.

Question 18

Factors influencing PES ?

Answer 18

Time scale, spare capacity, level of stocks, substitutable factors , barriers to entry

Question 19

time scale

Answer 19

In the short run, supply is more price inelastic, because producers cannot quickly increase supply. In the long run, supply becomes more price elastic

Question 20

Spare capacity

Answer 20

If the firm is operating at full capacity, there is no space left to increase supply. If
there are spare resources, for example in a recession there are lots of spare and
unemployed resources, supply can be increased quickly.

Question 21

Level of stocks

Answer 21

If goods can be stored, such as CDs, firms can stock them and increase market supply easily. If the goods are perishable, such as apples, firms cannot stock them for long so supply is more inelastic

Question 22

How substitutable factors are

Answer 22

If labour and capital are mobile, supply is more price elastic because resources can
be allocated to where extra supply is needed

Question 23

Barriers to entry to the market:

Answer 23

Higher barriers to entry means supply is more price inelastic, because it is difficult
for new firms to enter and supply the market

Question 24

what is the free market

Answer 24

any place where buyers meet suppliers to exchange goods or services free from government intervention

Question 25

what is market equilibrium

Answer 25

where demand = supply ( market clearing price)

Question 26

what is market disequilibrium

Answer 26

where demand doesn’t equal supply

Question 27

four functions of the price mechanism (ARSI)

Answer 27

• Allocate scarce resources efficiently
• Rationing scarce resources by encouraging/ discouraging consumption
• signal excess demand/ excess supply and need for an increase and decrease of resources
• incentivise producers to increase /decrease output to increase profit