4.1.3 Price determination Flashcards

1
Q

What is a market?

A

An institution connecting buyers with product and sellers with money.

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2
Q

What is demand?

A

The quantity of a product consumers are willing and able to buy at each price in a given time period

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3
Q

What are the determinants of demand?

A
  • advertising/ marketing
  • complementary product price/availability
  • population
  • substitute product price/availability
  • branding/fashion/tastes
  • disposable income
  • environment/weather
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4
Q

What is the law of demand?

A

As price increases, quantity demanded falls, vice versa, ceteris paribus

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5
Q

What are some of the exceptions to the law of demand?

A
  • Veblen goods - products for conspicuous consumption
  • Speculate goods - bought as price increases in hope that price increase will continue
  • Giffen goods - really inferior goods, demand decreases as income increases
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6
Q

What is marginal production?

A

The addition to total production from having one more worker

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7
Q

What is marginal cost?

A

The addition to total cost from buying one more unit

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8
Q

What is PED?

A
  • Price elasticity of demand - the responsiveness of the quantity demanded of a product to changes in price of the product
  • %ΔQDx / %ΔPx
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9
Q

What is totally inelastic demand?
What does it look like on a P-Q graph?

A

When PED = 0

Vertical line on P-Q graph

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10
Q

What is totally elastic demand?
What does it look like on P-Q graph?

A

When PED = -♾️

Horizontal line on P-Q graph

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11
Q

When PED is less than -1, is demand fairly elastic or inelastic?

A

When PED < -1, demand is fairly elastic

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12
Q

When PED is between 0 and -1, is demand fairly elastic or inelastic?

A

When -1 < PED < 0, demand is fairly inelastic

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13
Q

How can revenue be used to judge PED (if elastic or inelastic)?

A
  • Elastic PED: increased price -> decreased revenue
  • Inelastic PED: increased price -> increased revenue
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14
Q

What are the determinants of PED?

A

SPLAT:
- availability of Substitutes
- Proportion of income spent on product
- Luxury vs necessity
- Addiction/habit/branding (negative correlation)
- Time

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15
Q

What is supply?

A

The quantity of a product that producers are willing and able to supply onto the market at each price in a given time period

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16
Q

Why do firms supply?

A

To make profit (revenue - cost)

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17
Q

What is the law of supply?

A

As price increases, the quantity supplied increases, vice versa, ceteris paribus

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18
Q

What are the determinants of supply?

A

PINTSWC:
- Productivity
- Indirect taxes
- Number of firms/producers
- Technology
- Subsidies
- Weather
- Cost of production

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19
Q

What is consumer surplus?

A

The difference between what the consumers are willing to buy each product for and the price it actually costs

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20
Q

What is producer surplus?

A

The difference between what the producers are willing to sell each product for and the price they actually get

21
Q

What is PES?

A
  • Price elasticity of supply - the responsiveness of the quantity supplied of a product to changes in the price of that product
  • %ΔQSx / %ΔPx
22
Q

What is totally inelastic supply?
What does it look like on a P-Q graph?

A

When PES = 0
Vertical line on P-Q graph

23
Q

What is totally elastic supply?
What does it look like on a P-Q graph?

A

When PES = ♾️
Horizontal line on P-Q graph

24
Q

What is the elasticity of supply when PES is between 0 and 1?

A

Fairly inelastic

25
What is the elasticity of supply when PES is greater than 1?
Fairly elastic
26
What is unitary elasticity?
When PES = 1 Applies for all straight line supply through the origin
27
What are the determinants of PES?
- availability/cost of resource - time - amount of spare capacity - amount of stock - closeness of producer substitutes - ease of entry to market
28
What is equilibrium/ allocative effieciency?
- When supply = demand - Economic forces are in balance and so price and quantity supplied or demanded will not change, ceteris paribus
29
Why is equilibrium a desired quantity?
It balances cost and utility (allocative efficiency)
30
Where is productive efficiency on a PPF?
All points on a PPF curve
31
What happens when demand increases (shifts right)?
- Higher quantity is demanded, quantity equilibrium is supplied - Shortage as D>S - Buyers are willing to pay more, sellers take advantage and increase price - Leading to an extension in supply, and a contraction in demand - So price increases until equilibrium and market clears again
32
What happens when supply increases (shifts right)?
- Higher quantity supplied, quantity equilibrium demanded - Surplus created as S>D - Sellers will decrease price as buyers offer less - Leading to a contraction in supply, and an extension in demand - So price decreases until equilibrium
33
What is YED?
- Income elasticity of demand - the responsiveness of the quantity demanded of a product to changes in income - %ΔQDx / %ΔY
34
What is the income elasticity when YED is greater than 1, and what type of good has this YED? What does it look like on a Y-Q graph?
- Highly income elastic - Luxury good - Horizontal line
35
What is the income elasticity when YED is between 0 and 1, and what type of good has this YED?
Highly income inelastic Necessity
36
What is the elasticity of income when YED is less than 0, and what type of goods have this YED?
Negative income elasticity Inferior good
37
What is XED?
- Cross-price elasticity of demand - the responsiveness of the quantity demanded of one product to changes in price of another product - %ΔQDx / %ΔPy
38
What type of products have a positive XED?
Substitutes
39
What type of products have a negative XED?
Complements
40
What type of products have an XED of 0?
Unrelated products
41
What type of products have an XED of ♾️?
Extremely closely related products
42
Why does price move in accordance with market forces?
To help allocate resource
43
What are the 3 functions by which price helps to allocate resource?
1. Signal function - tells producers to increase quantity supplied 2. Incentive - price increases so that firms can increase profit so producers switch to that product 3. Rationing mechanism - price limits who can buy luxury items
44
What happens if price is allowed to fulfil the functions to help allocate resource?
More efficient allocation of resource, at the cost of inequality, provision of harmful products, and pollution/ environmental destruction
45
What is derived demand?
If the demand for a product increases, the demand for the resource used to make the product also increases (e.g. cars and steel)
46
What is joint demand?
If the demand for a product increases, the demand for a complimentary product will also increase
47
What is competitive demand?
If the demand for one product increases, the demand of a substitute will decrease
48
What is composite demand?
If more of a product is sold, the supply of a product made of the same resource will decrease
49
What is joint supply?
If the demand for a product increases, the supply of a by-product of this product will increase (e.g. beef and leather)