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A level (Economics)- Microeconomics paper one > 4.1.3 - Price determination in a competitive market > Flashcards

4.1.3 - Price determination in a competitive market Flashcards

1
Q

Define Demand?

A

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

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2
Q

What is the relationship between the price and demand?

A
  • Demand varies with price
  • If the price is lower the more affordable the good and so consumer demand increases.
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3
Q

What are the factors that affect demand?

A
  • Price
  • Fashion
  • Scarcity
  • Price of other goods
  • Income
  • Substitutes
  • Compliments
  • Availability of credits
  • Population
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4
Q

What does PIRATES stand for?

A

Population
Income
Related goods
Advertising
Tastes and fashions
Expectations
Seassonals
These are factors affectin demand

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5
Q

What is effective demand?

A

when a consumers desires to buy a product is backed up by an ability to pay for it

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6
Q

What is latent demand?

A

Exists when there is willingness to purchase a good but where the consumer lacks the real purchasing power to be able to afford the product.

Its affected by persuasive advertising

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7
Q

What is derived demand ?

A

The demand for product x might be strongly linked to the demand for the related product y - giving rise to the idea of a derived demand

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8
Q

Give an example of derived demand?

A

The housing market- When construction of new homes rises so too does the demand for materials used in new properties as well a demand for labour.

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9
Q

What is complementary demand?

A

As the demand for mobile phone handsets increases so too does demand for phone calls

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10
Q

Why is the demand curve downwards sloping?

A
  • Lower prices consumers can afford to purchase more with income
  • Secondly, a fall in price makes one goodrelatively cheaper than a substitue.
  • Thirdly, a fall in price means that the consumer derives more benefit per pound spent on the product.
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11
Q

What is utility?

A

The measure of satisfaction that we get from purchasing and consuming a good or service.

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12
Q

What is total utility?

A

The total satisfaction from a given level of consumption.

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13
Q

What is amrginal utility?

A

The change in satisfaction from consuming an extra unit

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14
Q

What is the diminidhing marginal utility in terms of the demand curve?

A

Beyond a certain point, marginal utility may start to fall (diminish)
If marginal utility is falling then the consumers will only be prepared to pay a lower price
If marginal utility is falling then consumers will only be prepared to pay a lower price.
- explains demand curve

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15
Q

What is seasonal demand?

A

Seasonality refers to the flunctuations in output and sales related to the seassonal of the year.

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16
Q

What are substitutes?

A

They are replacements for another product.

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17
Q

What are complements?

A

Complements are said to be in joint demand.
Eg Fish and Chips

If the price of complement good x rises it will cause a fall in demand for good x

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18
Q

For normal products what happens to demand when incomes rises?

A

More is demanded

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19
Q

What are inferior goods?

A

They are cheaper poorer quality substitutes for some other good.

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20
Q

What happens to demand when someone has an higher income?

A

A consumer can switch from the cheaper substitute to preferred alternative.
As a result, less of inferior product is demanded at higher level pf income

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21
Q

What is income elasticity of demand?

A

There is a strong link between income and demand.
Eg New cars

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22
Q

What are some exceptions to the law of demand?

A
  • specdulative demand - buyers just aren’t interested in the satisfaction they might get.
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23
Q

What is composite demand?

A

Exists where goods have more than one use- an increase in the demand for one product leads to a fall in supply of the other

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24
Q

What is the elasticity theory look at?

A

The sensitivity of one variable in relationship to another.

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25
Q

What is the price elasticity of demand?

A

It measures the responsiveness of demand to a change in price.

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26
Q

How is PED calculated?

A

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

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27
Q

Explain the inverse relationship between price and demand?

A
  • When price falls we expect to see an expansion in demand
  • When price rises we expect to see a contraction in demand
  • Therefore an inverse relationship between price and demand
    (giving a negative value of PED each time)
  • We ignore the sign but focus on the coefficent of elasticity
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28
Q

If the PED coefficent is 0 the demand is ….

A
  • Perfectly inelastic - demand does not change when price changes.

so a business can charge as high price as it wants to.

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29
Q

If the PED is between 0<1 the demand is…

A

Price inelastic- A firm should raise P. D will decrease but total revenue will increase

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30
Q

If PED= 1….

A

The demand is said to unit elastic
Increasing or decreasing price will lead to no change in total revenue

31
Q

If PED> 1 …

A

Then demand responds more than proprtionatley to a change in price.
I.e Demand is elastic
A firm should lower price, demand will increase, but total revenue will increase.

32
Q

Why is PED imporant for a business?

A
  • The effect of a change in price on quantity demanded
  • The effect of a change in price on total revenue.
33
Q

What is cross elasticity of demand?

A

The responsiveness of a change in demand of one good x to a change in price of another good Y

34
Q

What is the formulae for cross elasticity of demand?

A

% change in quantity demanded of good x / % change in price of good Y

35
Q

What is income elasticity of demand?

A

Measure of the responsiveness of demand to a change in income

36
Q

What is the formulae for income elasticity of demand?

A

% change in quantity demanded/% change in income

37
Q

What type of income elasticity do normal goods have?

A

Positive income elasticity

38
Q

What type of income elasticity do luxury goods have?

A

> +1

39
Q

What type of income elasticity do necessaties have?

A

> 0 and <+1

40
Q

What type of income elasticies do inferior goods have?

A

negative

41
Q

What is the relationship between income elasticities and inferior goods?

A
  • Inferior goods are those which see a fall in demand as income rises
  • Eg ‘ The value options at supermarkets could be seen as inferior . As income increases, consumers switch to branded good’
  • YED>0
42
Q

The relationship between normal goods and income elasticity?

A

With normal goods demand increases as income increases YED>0

43
Q

What is the relationship between luxury goods and income elasticity?

A

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

44
Q

What is the coefficent for substitutes in cross elasticity of demand?

A
  • Close substitutes have a strongly positive cross price elasticity of demand
45
Q

What is the coefficent for complements in cross elasticity of demand?

A
  • When there’s a strong complementary relationship, the cross elasticity will be highly negative.
  • eg software games.
46
Q

What is the coefficent for unrelated products in cross price elasticity ?

A
  • Unrelated products have zero cross elasticity
47
Q

What is the relationship between close substitutes and cross price elasticity?

A

A small rise in price of x causes large rise in demand for Y

48
Q

What is the relationship between weak substitutes in cross elasticity

A

A large rise in price of s leads to small increase in demand for T

49
Q

What is the relationship between close complements in cross elasticity?

A

A small fall in price of A causes a large rise in demand for B

50
Q

What is the relationship between weak complements and cross elasticity?

A

A large drop in price of E causes only small rise in demand for F

51
Q

What is the relationship between PED and firms total revenue?

A

When demand is elastic (price elasticity), price and total revenue have a negative relationship, meaning that price rises lead to lower total revenue

52
Q

What are some factors influencing PED?

A
  • necessity
  • substitutes
  • addictions or habits
    -Proportion of income spent on good
  • Durability of good
  • Peak and off peak demand
53
Q

What is supply?

A

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

54
Q

What does the supply curve show?

A

It shows the relationship between price and quantity supplied

55
Q

What causes the upward sloping supply curve?

A
  • If price increases it is more profitable for firms to supply the good so supply increases.
  • High prices encourage new firmsn to enter the market because it seems profitable so supply increases.
  • Therefore, with larger outputs of supply the incentive to rxpand production is presented therefore they need hgher prices to cover costs.
56
Q

In perfect competition what is the supply curve also nown as>

A

The marginal cost curve (MC)

57
Q

What DOES NOT shift the supply curve?

A

Price

58
Q

What Mnemonic can help with recalling factors shifting the supply curve?

A

PINTSWC

59
Q

What factors shift the supply curve?

A

Productivity
Indirect taxes
number of firms
technology
subsidies
weather
costs of production
(macro-supply curve can be shifted by exchnage rates)

60
Q

What is PES?

A

It’s a measure of the responsiveness of supply to a change in price.

61
Q

What is the PES formulae?

A

Measures the responsiveness of supply to a change in price.

62
Q

What happens if supply is elastic?

A

Producers can increase their output without a rise in cost or a time period.

63
Q

What happens if supply inelastic?

A

Firms find it hard to chnage their production in a given time period.

64
Q

What is the formuale for PES?

A

%change in Quantity supplied/ % change in price

65
Q

What is the coefficent for when Supply is Price elastic ?

A

PES is >1

66
Q

what is the coefficent when supply is price inelastic?

A

<1

67
Q

what is the coefficent when supply is perfectly inelastic?

A

0

68
Q

What is the coefficent when supply is perfecly elastic?

A

Infinity

69
Q

What factors influence PES?

A
  • Time scale- In the short run supply is more inelastic but in long run is more price elastic.
  • Spare capacity
  • level of stocks
  • How substitutable factors are
  • Barriers to entry to the market
70
Q

When is a market at equlibrium?

A

When price and output are stable and when there’ a balance in the market and supply is equal to demand .

71
Q

What are the determinants of equlibrium?

A
  • Supply and demand.
    ( Known as market forces)
72
Q

What does disequlibrium mean?

A
  • When suppply and demand are not equal the market is in disequilibrium
  • eg when theres an excess supply or excess demand the market will be in disequilbrium
73
Q

What would happen to excess supply if price is set above the equibrium?

A
  • Supply will contract and price will reduce
74
Q

What are the types of demand?

A
  • Derived demand- This when the demand for one good is linked to the demand for a related good.
  • Composite demand- When the good demanded has more than one use (E.g Milk)
  • Joint demand - when goods are bought together such as a digital camera and a memory card

A level (Economics)- Microeconomics paper one (8 decks)

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