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Microeconomics > 4.1.3 Price determination in a competitive market > Flashcards

4.1.3 Price determination in a competitive market Flashcards

1
Q

What is the definition of demand?

A

Number of consumers willing and able to purchase goods or services at a certain price.

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2
Q

What is a normal good?

A

If price rises, demand will fall and vice versa, i.e. negative correlation

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3
Q

What does ‘ceteris paribus’ mean?

A

All other factors remain the same

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4
Q

What are the factors which influence demand?

A
  • price of good
  • consumer income
  • prices of other goods and services
  • consumer tastes and fashion
  • advertising
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5
Q

What is a veblen good?

A
  • type of luxury good which demand increases as price increases, contradiction to law of demand
  • named after Thornstein Veblen (1857-1929) who identified ‘snob effect’
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6
Q

What are inferior and Giffen goods?

A
  • inferior goods- demand decreases as incomes increase.
  • Giffwn goods- certain inferior products where demand rose as consumer incomes increased
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7
Q

What are substitute and complementary products?

A
  • substitute products- acts as an alternative, creating competition, e.g. Price of Good A increases, demand of Good B increases
  • complementary products- bought alongside a good/service, e.g. if price of Good A increases, demand of Good B decreases.
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8
Q

What is the definition of supply?

A

Quantity of goods/services producers are willing and able to produce and sell at a given price.

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9
Q

What are the rules for drawing supply curves?

A
  • label y axis price and x axis quantity
  • draw supply curve upwards, sloping from left to right- label supply
  • find quantity supplied at any given price- select Price (P) draw dotted line towards supply curve, draw dotted line down to show Q
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10
Q

What are the determinants of Supply in a market?

A
  • price of good
  • impact of changing costs of production
  • technological progress
  • prices of other goods/services
  • gov policy, e.g. taxes
  • other factors, e.g. expectations
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11
Q

What is taxation?

A

Charge placed on individuals or firms, by gov- who use tax to finance spending.

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12
Q

What are indirect taxes?

A

Placed on goods and services produced by individuals/firms (e.g. VAT- paid by supplier not consumer) Act to increase overall cost of production. Will lead, ceteris paribus, to a decrease in profit and disincentive for firms.

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13
Q

What are direct taxes?

A

Placed on income of individuals/firms e.g. income tax and corporation tax.

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14
Q

What are subsidies?

A

Money provided by gov to producers, effectively act to reduce overall cost of production and lead, ceteris paribus, to an increase in profit. Provide incentive for firms to increase supply.

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15
Q

What do the shifts in supply curves represent?

A
  • increase in supply shown by a shift to right
  • decrease in supply shown by a shift to left
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16
Q

What is specific tax and what is ad valorem tax?

A
  • Specific tax- set amount per unit, e.g. 50p per fizzy drink. Leads to a parallel leftwards shift in supply curve.
  • Ad Valorem tax- percentage of price. More expensive the product, greater actual amount of tax. Shift in supply curve left whilst also tilting.
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17
Q

What is market equilibrium?

A

Point at which demand is equal to supply. Known as market clearing price, all products sold at this price. Buyers get exact amount they want to buy at this price and seller provide exact amount they want to sell at this price.

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18
Q

What is excess supply?

A
  • Firms supply more than consumers demand/ are willing and able to buy
  • Wouldn’t sell excess
  • firms have to reduce price of excess products to get rid of them.
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19
Q

What is excess demand?

A
  • Buyers demand more at a lower price.
  • firms wish to supply less at this price
  • too much demand in market
  • firms should raise prices, remove excess demand.
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20
Q

What is the process of removing excess supply/demand?

A

Allocate scarce resources (4)
Ration excess demand/supply (3)
Signals price is too low/high (1)
Incentives to change price and increase profit (2)

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21
Q

What is Competitive Demand?

A
  • Alternative or Substitute goods that can be bought
  • When demand or supply conditions for substitute changes, this will impact demand for good.
  • Increase in supply of substitute will lead to decrease in demand for alternative good.
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22
Q

What is Derived Demand?

A
  • Demand for a factor of production or good used to produce another good or service
  • Example: demand for housing leads to demand for labour, bricks, cement, e.t.c
  • Increase in demand for one good will see an increase in derived demand for another good.
23
Q

What is Composite Demand?

A
  • Goods and services have more than one use so that an increase in demand for one product leads to a fall in supply for the other products
  • Example: milk has multiple uses so increase in demand for butter reduces supply of yogurt.
24
Q

What is Joint Supply?

A
  • Occurs when production of one good leads to supply of another.
  • Increase in supply of one good leads to increase of supply of other good
  • Example: increase in production of wheat will increase supply of straw
  • Increase in supply of one product leads to an increase in Joint-supply of another product.
25
Q

What is ‘Elasticity’?

A
  • Refers to how responsive one factor is to a change in another factor.
  • Predominantly, we analyse how responsive (how much change there is) quantity demanded is, to change in other factors, e.g. price of good, income of consumers, e.t.c.
26
Q

What is the formula for PED?

A

% change in quantity demanded / % change in price

27
Q

What does it mean if PED is 0?

A
  • Demand is Perfectly Inelastic
  • Quantity demanded doesn’t change when price changes
  • Extreme cases, necessity goods that have no substitutes
  • Implies consumers are willing and able to pay any price for product.
  • If supply falls, price can rise without any contraction QD
28
Q

What does it mean if PED is between 0 and -1?

A
  • Demand is Price Inelastic
    -% change in qd smaller than % change in price
  • Demand not very responsive to changes in price
  • More likely for goods with few substitutes
  • Can raise price and QD will fall by a smaller % than firm has increased it by.
29
Q

What does it mean if PED is > -1?

A
  • Demand is Price Elastic
  • % change in QD is greater than % change in price
  • Demand very responsive to changes in price
  • Goods that have lots of substitutes, easy for consumers to buy alternatives.
30
Q

What does it mean if PED is infinity?

A
  • Demand is Perfectly Elastic
  • One price consumers are prepared to pay, if there’s a change in price, qd will drop to 0
  • Extreme cases, competitive markets where there are many close substitutes (Homogeneous Products)
31
Q

What does it mean if PED is 1?

A
  • % change in qd is same as % change in price
  • Demand is ‘Unitary Elastic’
32
Q

What factors determine the PED of a product?

A
  • Substitutes
  • Percentage of income
  • Luxuries/Necessities
  • Addictive/Habit forming
  • Time period
33
Q

How is PED useful for firms?

A

Enables firm to predict:
- Likely impact of change in price on total revenue
- Likely impact of changes in supply conditions on price and revenue- important for commodity producers who suffer when price and revenue shit from one time-period to another
- Likely effect of a change in indirect tax on price and QD

34
Q

Define Price Discrimination?

A

Charging different prices for the same product to different segments of a market.

35
Q

What is Revenue and how is it calculated?

A
  • Total amount of money coming into a business, generated through sales of goods and services
  • Quantity sold X price
36
Q

What is Price Elasticity of Supply (PES)?

A

Measures responsiveness of Qs given a change in price.

37
Q

What does Price Elastic Supply mean?

A
  • Supply is sensitive to changes in price
  • Small change in price causes a proportionately big change in supply
38
Q

What does Price Inelastic Supply mean?

A
  • Supply is not sensitive to changes in price
  • Big changes in price cause a proportionately small change in supply
39
Q

How do you calculate PES?

A

% change in Qs / % change in P

40
Q

What does it mean if PES is >1?

A

Supply is Price Elastic

41
Q

What does it mean if PES is <1?

A

Supply is Price Inelastic

42
Q

What does it mean if PES is 0?

A

Supply is perfectly Price Inelastic

43
Q

What does it mean if PES is infinity?

A

Supply is perfectly Price Elastic

44
Q

What does it mean if PES is 1?

A

Supply is unit Price Elastic

45
Q

What factors determine the PES of a product?

A

Production Lag
Stocks
Spare Capacity
Substitutability of FoPs
Time

46
Q

What does Income Elasticity of Demand mean (YED) and how is it calculated?

A
  • measures responsiveness of qd, given a change in income
  • calculated by % change in qd / % change in income
47
Q

What are the different types of normal good that YED can be?

A

> 1 demand is income elastic- normal luxury
<1 demand is income inelastic- normal necessity

48
Q

What are the different types of inferior good that YED can be?

A

> 1 demand is income elastic
<1 demand is income inelastic

49
Q

What does it mean if YED is 0?

A

Demand is perfectly income inelastic- no relationship between income and quantity demanded

50
Q

What is Cross Elasticity of Demand (XED) and what is the formula?

A
  • measures responsiveness of quantity demanded for good A, given a change on price of good B
  • % change in QDa / % change in P
51
Q

What does it mean if XED is either positive/negative?

A
  • if XED is positive- 2 goods are substitute goods, price of A increases, quantity demanded for B increases
  • if XED is negative- 2 foods are complementary goods, price of A increases, quantity demanded for B decreases
52
Q

What do the different number values for XED mean?

A

> 1 demand between goods is price elastic (strongly related)
<1 demand between goods is price inelastic (weakly related)
0 demand between foods is perfectly price inelastic

53
Q

Explain why the Supply Curve is upward sloping.

A
  • If price increases, it’s more profitable for firms to supply the good, so supply increases
  • High prices encourage new firms to enter market, because it seems profitable- supply increases
  • With larger outputs, firm’s costs increases, so they need to charge a higher price to cover the costs

Microeconomics (8 decks)

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