4.1.3 Price determination in a competitive market

Question 1

What is demand?

Answer 1

The amount of a good or service that consumers are willing and able to buy, at a given price at a given time

Question 2

What is derived demand?

Answer 2

The demand for a factor of production used to produce another good/service

Question 3

What is composite demand?

Question 4

What are the 9 determinants of demand?

Answer 4

1. Income
2. Advertising and Publicity
3. Fashion
4. Quality
5. Seasonal Changes
6. The Law
7. Uncertainties about future prices
8. Price of compliments
9. Price of Substitutes

Question 5

What are complementary goods?

Answer 5

Ones that are frequently bought together - e.g Cereal and Milk

• when the price for one goes up, the demand for the other goes down
• the strength of complements is shown through cross-elasticity

Question 6

What are substitute goods?

Answer 6

Ones which have (roughly) the same function, and therefore either one OR the other is bought

• When the price of one increases, demand for the other goes up

Question 7

What are normal goods?

Answer 7

Goods that - as incomes rise in society - people buy more of

• Cars, TVs, Chocolates

Question 8

What are inferior goods?

Answer 8

Goods that - as incomes rise in society - people switch to better alternatives

• Bus Travel, Own-brand food

Question 9

What is Price Elasticity of Demand (PED)?

Answer 9

The responsiveness of a change in quantity demanded to a change in price

• how much do people react (change purchasing habits), when price of a good changes

Question 10

What is the formula for PED?

Answer 10

PED = %change of QD/%change of price