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Mircroeconomics - 4.1 Individuals , Firms , Markets and Market Failure > 4.1.3 Price Determination in a competitive market > Flashcards

4.1.3 Price Determination in a competitive market Flashcards

1
Q

Define supply

A

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

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2
Q

What is the basic law of supply and the reasonings for it

A

Is that as the price of a product rises businesses expand supply to the market

Profit motive
Production and costs
New entrants into the market

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3
Q

What is a supply curve

What does it represent

A

Shows the relationship between market price and how much a firm is willing and able to sell (shows marginal cost curve)

Represents minimum price firms would accept to produce quantity

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4
Q

Define marginal cost

A

The additional cost of producing one more unit of output

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5
Q

What does a supply curve represent

A

The quantity of goods and services that can be sold in current market conditions. A increase or decrease in the supply curve can change the price of output. Can change based on wants of people

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6
Q

What is the acronym for factors that can change supply

A

Productivity
Indirect taxes- inward shift of supply (tax to produce)
Number of firms in the market
Technology
Subsidies- outwards shift of supply (money granted by gov to keep price low)
Weather/natural disaster/war
Cost of production

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7
Q

Define Joint supply

A

Is where an increase/decrease in the supply of one good leads to an increase/decrease in the supply of a by product

E.g. contraction in the market of Lamb will reduce the supply of wool

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8
Q

Define Demand

A

The quantity of a good or service that purchasers are willing and able to buy at a given price in a given time period

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9
Q

What is the basic law of demand

A

Is that demand varies inversely with price - lower prices make products more affordable for customers

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10
Q

What is the formula for average revenue

A

Total revenue / output

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11
Q

What does a demand curve represent

A

Shows us the price we would need to sell at in order to sell different quantities of output

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12
Q

What are the factors that cause a change in the total demand at any price

Acronym

A

Population - higher population means more demand
Advertising : makes you think your wants are needs
Substitute goods (price of) : competitors pricing effect demand
Interest rates: cost of borrowing and reward for saving
Fashion and trends: based on time of year and social preferences
Income: higher incomes means more spending
Complementary goods: demand for one good can increase demand for another. E.g. cars and fuel

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13
Q

What can the demand curve also represent

A

Average revenue

Marginal utility

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14
Q

Define marginal utility

A

The change in satisfaction from consuming an extra unit

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15
Q

Define total utility

A

The total satisfaction from a given level of consumption

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16
Q

What effect will an increase in demand have on the demand curve

A

Will cause a rightwards shift

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17
Q

What effect will a decrease in demand have on the supply curve

A

Cause a leftwards shift

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18
Q

What are the social and emotional factors influencing demand

A

Social awareness - health risks of products
Social norms- changing normal behaviour
Social pressures- forced into buying products
Demand for products can have a strong emotional attachment

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19
Q

Define price determination

A

Where the forces of supply and demand are used to establish the general level of price for a good or service

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20
Q

What does the point where the supply curve and demand curve meet represent

A

The total welfare at current market conditions
The most allocative efficient level of output (the level which best meets the needs and wants of society)
The price determination and equilibrium

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21
Q

Define customer surplus

Where is it shown on the price determination graph

A

The additional benefit consumers gain from purchasing a good below the maximum price they would have been willing to pay for it.

Above the equilibrium point

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22
Q

Define producer surplus

Where is it shown on the price determination graph

A

The additional benefit producers gain from selling a good above the minimum price they would have been willing to sell it for

Below the equilibrium

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23
Q

Define the total welfare

A

The equal sum of both consumer surplus and producer surplus, both benefit from it

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24
Q

How would an increase in population change the price determination graph

A

An increase in demand

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25
Q

What would an increase of the cost of production of cars have on the price determination graph

A

The supply curve would decrease

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26
Q

What would an increase in the price of wheat (complementary good) and a decrease in subsidies for bread producers do to the price determination graph

A

A decrease in the supply curve

A decrease in demand curve

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27
Q

What would an increase in productivity of boats and a decrease in interest rates have on the price determination graph

A

A increase in the supply curve

A increase in the demand curve (people will not think saving is worth doing so will spend)

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28
Q

Define indirect tax

A

Imposed on producers and is sometimes passed on to the consumers as part of the price

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29
Q

What are the two examples of indirect tax

A 
VAT(Value added tax)
Excise duty(fixed amount e.g. £1 per bottle of wine)
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30
Q

How can the effect of indirect tax be seen on a s&d grapn

A

The vertical distance between the original supply amount and the supply amount with the effect of indirect tax.

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31
Q

What is tax incidence

A

The division of the tax burden between producers and consumers

Consumers benefit more than producers as it gives them an extra cost of production

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32
Q

Define a subsidy

A

Payments from the government to producers to reduce their costs. This is done to increase supply and therefore reduce the market equilibrium price

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33
Q

How can you identify the effect of a subsidy on a S&D graph

A

The vertical distance between the original supply amount and the supply with the effect of a subsidy

34
Q

What is the incidence of a subsidy

A

Is who benefits from the effect of a subsidy. Usually producers and consumers equally benefit as market price goes down and producers do not decrease price by how much subsidies they get.

35
Q

Define price elasticity of demand

A

Measures the responsiveness of demand after a change in the goods own price

36
Q

What is the formula for price elasticity of demand

A

% change in quantity demanded / % change in price

37
Q

What are price elastic demand graphs

How does the slope look

A

Measure quantity demanded in response to price change. For elastic goods to increase revenue reduce the price.

Is a flatter line

38
Q

What are price inelastic demand graphs

How does the slope look

A

Shows that for inelastic goods to increase revenue the price must increase

Is a much steeper line

39
Q

What is price elastic demand

A

Means that as the price increases for a product the demand decreases

40
Q

What is price inelastic demand

A

Means that as price increases it does not have a big overall change on demand (e.g.cigarettes)

41
Q

How can you tell whether a good is price elastic or price inelastic demand

A

Elastic price is greater than one

Inelastic price is less than one

+ and - do not matter

42
Q

Calculate the Price elasticity demand when :

a) price of £1, quantity demanded of 100 units
b) price of £1.10, quantity demanded of 50 units

Is it elastic or inelastic

A

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

£1 -> £1.10 = +10%
100 units -> 50 units = -50%

PED = -50/10 = -5
Means that it is elastic

43
Q

Calculate the Price elasticity of demand when :

a) price = £10, QD =1000 units
b) price = £12 , QD = 900 units

Is it elastic or inelastic

A

PED = % change in QD / % change in price

Price £10 -> £12 = +20%
QD 1000 units -> 900 units = -10%

PED = -10% / 20% = -0.5
Means it is an inelastic good

44
Q

Describe the relationship between price elasticity of demand and revenue

A

The price movement of an elastic good will cause the revenue to move in the opposite direction (increased price means decreased revenue)

The price movement of an inelastic good will cause the revenue to move in the same direction (increased price means increased demand)

45
Q

What does perfectly inelastic demand mean
What does perfectly elastic demand mean

Can it happen

A

Perfectly inelastic is a straight vertical line on the graph which means any price change will not effect demand

Perfectly elastic is a straight horizontal line on the graph which means any price change will being demand down to 0

It is very rare for demand to be perfectly inelastic/elastic

46
Q

Define Income elasticity of demand (YED)

A

Shows how responsive the demand for a product is to a change in real income

47
Q

What is the formula for Income elasticity of demand (YED)

A

% change in quantity demanded / % change in real income

48
Q

What is a normal good

What is its elasticity

A

Is a product where as income rises demand increases

It has a positive income elasticity

Its YED has to be greater than 0 to be a normal good

49
Q

What is an inferior good

What is its elasticity

A

Where increased income leads to a fall in demand (supermarket beans)

Negative income elasticity

Its YED has to be less than 0 for it to be inferior

50
Q

What does a normal good curve look like

A

It has a positive slope with a low gradient

Shows that as income goes up demand also goes up

51
Q

What does a inferior good curve look like

A

Has a negative slope with a steep gradient

Shows how a increase in income reduces quantity

52
Q

Calculate the Income elasticity of demand when :

a) income = £10,000, Qd = 2,000
b) income = £12,000, Qd= 3,000

Is it a normal good or an inferior good

A

YED = % change in Qd / % change in real income

Y 10,000 -> 12,000 = +20%
Qd 2000 -> 3000 = +50%
YED= 50/20 = 2.5

Is a normal good

53
Q

Calculate the Income elasticity of demand when:

a) Y=£20000, Qd= 1000 units
b) Y=£30000, Qd= 500 units

A

YED = change in quantity demanded / change in real income
Y 20000 -> 30,000 = +50%
Qd 1000 -> 500 = -50%

YED = -50% / 50% = -1
Less than 1 so is an inferior good

54
Q

What does effective demand mean

A

Where a person has a demand for a product and can afford it

55
Q

Define Cross Price Elasticity of Demand (XED)

A

Measures the responsiveness to of demand for good x following a change in the price of good y

56
Q

What is the formula for cross price elasticity of demand

A

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

57
Q

Calculate the cross price elasticity of demand:

a) price of playstation = £250, Qd of xbox = 5 million units
b) price of playstation= £300, Qd of xbox = 6 million units

Is it an example of a substitute good or a complementary goods

A

XED = % change in demand of y / % change in price of x

XED = +20% / +20% = 1
Over 0 so is a substitute good

58
Q

Calculate the cross price elasticity of demand:

a) price of games = £50, Qd of consoles = 4million units
b) price of games = £30, Qd of consoles = 5million units

Is it substitute or complementary

A

XED = % change in demand of Y / % change in price of x

Xed = 25% / -40% = - 0.625
Less than 0 so complementary good

59
Q

How do you know whether cross price elasticity of demand is substitute or complementary

A

Substitute if over 0

Complementary if under 0

60
Q

What are substitute goods

A

Products in competitive demand

An increase in price will increase demand for a competitors good

61
Q

What are complementary goods

A

Are products in joint demand

A fall in price for one product will increase demand for another (e,g. Fall in price of xbox games will increase demand for Xbox consoles)

62
Q

What are close substitutes

A

Have a strong positive cross price elasticity of demand

Small change in price causes a big change in consumer demand

63
Q

Define price elasticity of supply (Pes)

A

Measures the relationship between change in quantity supplied and a change in price

64
Q

What is the formula for price elasticity of supply

A

% change in quantity supplied / % change in price

65
Q

What does elastic supply mean

What does inelastic supply mean

A

Output can be increased without a rise in cost

Its hard to change level of production

66
Q

How can you tell whether the price elasticity of supply is elastic or inelastic

A

Greater than 1 is elastic

Less than 1 is inelastic

67
Q

What does a elastic supply graph look like

A

Shows how a increase in market price will lead to a major increase in quantity supplied to the market

68
Q

What does an inelastic supply graph look like

A

Shows how a Increase in market price will lead to a small increase in quantity supplied to the market

69
Q

What are the 4 factors effecting price elasticity of supply

A

Spare production capacity (plenty of supply means output can be increased without a rise in costs)
Stocks of finished products (able to respond to change in demand)
Ease and cost of factor substitution/mobility (if capital and labour is mobile resources can be mobilised to supply extra output)
Time period and production speed (firm needs time to adjust production levels)

70
Q

What factors could mean a firm has inelastic supply of demand

A

Does not have enough resources available
Factors substitution is not easily substitutable
Not enough finance available

71
Q

Are products elastic or inelastic in the short run or long run

A

Products are elastic in the long run

Products are inelastic in the short run

72
Q

Why do governments intervene in markets

A

Is done to combat market inequities and to promote economic fairness as well as maximising social welfare

73
Q

What is minimum pricing

What do they do

A

Represents the minimum price a product can be sold for , imposed by the government

Is used to give producers a higher price to sell at or reduce the consumption of food

74
Q

How can minimum pricing be seen on a graph

A

Is a straight line which reduces quantity demanded and increases quantity supplied by producers. Creates excess supply.

Increases producer surplus and decreases consumer surplus causing a net welfare loss

75
Q

What is maximum pricing

A

Where the government put a regulation on the maximum price a good can be sold for

76
Q

How can maximum pricing be seen on a graph for the housing market

A

Putting a maximum price on housing will reduce supply and will cause excess demand , causing inefficiency in the market.
Excess Demand

There will be an increase in consumer surplus and decrease in producer surplus.

77
Q

What is unitary elastic demand

A

Where the PED is 1

78
Q

What is composite demand

What is derived demand

A

When a good is demanded for more than one distinct use

When a good or factor of production is necessary for the provision of another good/service. E.g. increased demand for healthcare leads to an increased demand for nurses and doctors.

79
Q

What are the determinants for the price elasticity of demand

A 
Availability of close substitutes 
Percentage of income spent on the product
Nature of the product (necessity or not)
Broad or specific market 
Time period
80
Q

Define joint demand

A

When a good is purchased alongside another good as it helps satisfy a need or want

E.g. milk and tea

Mircroeconomics - 4.1 Individuals , Firms , Markets and Market Failure (8 decks)

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