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Micro Economics > 4.1.3 price determination in a competitive market > Flashcards

4.1.3 price determination in a competitive market Flashcards

1
Q

What is a market?

A

anywhere buyers and seller meet to exchange goods and services

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2
Q

competitive market

A

A market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market.

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3
Q

equilibrium price

A

the price at which planned demand for a good or service exactly equals planned supply

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4
Q

supply

A

the quantity of a good or service that firms are willing and able to sell at given prices in a given period of time

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5
Q

demand

A

the quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time

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6
Q

Market demand

A

the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices

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7
Q

normal good

A

a good for which the demand increases as income rises and decreases as income falls

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8
Q

inferior good

A

A good for which demand decreases as income rises and demand increases as income falls

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9
Q

Elasticity

A

the proportionate responsiveness of a second variable to an initial change in the first variable

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10
Q

price elasticity of demand

A

measures the extent to which the demand for a good changes in response to a change in the price of that good

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11
Q

income elasticity of demand

A

measures the extent to which the demand for a good changes in response to a change in income, it is calculated by dividing the percentage change in quantity demanded by the percentage change in income

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12
Q

cross elasticity of demand

A

Measures the extent to which the demand of a good changes in response to a change in the price of another; it is calculated by dividing the percentage change in quantity demanded of one good by the percentage change in the price of the other good

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13
Q

profit

A

Total revenue - total costs of production

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14
Q

total revenue

A

the money a firm receives from selling its output, calculated by multiplying the price by the quantity sold

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15
Q

price elasticity of supply

A

measures the extent to which the supply of a good changes in response to a change in the price of that good

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16
Q

Equilibrium

A

a state of rest or balance due to the equal action of opposing forces.

Where supply and demand meet

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17
Q

Disequilibrium

A

a situation in a market when there is excess supply or excess demand

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18
Q

excess supply

A

when firms wish to sell more than consumers wish to buy, with the price above the equilibrium price

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19
Q

excess demand

A

When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price.

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20
Q

Joint supply

A

when one good is produced, another good is also produced from the same raw materials

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21
Q

Competing supply

A

when raw materials are used to produce one good they cannot be used to produce another good. If two goods can be produced by the same factors of production, the supplier must decide

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22
Q

Composite supply

A

Composite demand happens when goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other. E.g. milk which can be used for cheese, yoghurts, butter

23
Q

complementary good

A

A good in joint demand, or a good which is demanded at the same time as the other good

24
Q

substitute goods

A

a good in competing demand, namely a good which can be used in place of another good

25
Q

Composite demand

A

Demand for a good which has more than one use

26
Q

derived demand

A

Demand for a good which is an input into the production of another good

27
Q

Law of Demand

A

As the price of a good falls, more is demanded (vice versa)

28
Q

Extension in demand

A

An increase in quantity demanded as a result of a reduction in price (movement to the right on the curve)

29
Q

Contraction in demand

A

decrease in quantity demanded due to a rise in price (movement to the left on the curve)

30
Q

Determinants of demand

A 
Population
Advertisements
Substitutes
Income (disposable)
Fashion
Income tax 
Complements
31
Q

Perfectly elastic demand

A

PED is usually negative as most goods follow the law of demand

  • change in price>change in demand: INELASTIC (PED -1>x>0)
  • change in price
32
Q

elastic demand

A

An increase in price leads to a larger fall in demand which causes revenue to fall

33
Q

Unit elasticity of demand

A

A good has unit elasticity when the % price change = the % demand change.

34
Q

inelastic demand

A

PED is between 0 and 1. Price increase is more than the fall on demand therefore it is good for firms as they can make more revenue

35
Q

Perfectly inelastic demand

A

A perfectly inelastic demand is a demand where the quantity demanded does not respond to price.

36
Q

Perfectly elastic demand

A

PED is infinity. Any increase in price means demand will fall to zero. Consumers will buy all they can at a given price but will not pay higher. Any increase in price will mean 0 demand, any decrease will mean less profit
https://quizl

37
Q

YED normal

A

if the YED of a product is POSITIVE i.e. x>0, then the good is normal as demand rises as income rises.

38
Q

YED inferior

A

If the YED of a product is NEGATIVE i.e. x<0, then the good is inferior as demand reduces as income rises.

39
Q

Perfectly inelastic YED

A

Any change in income does not affect demand i.e. salt. If you got richer, why would you buy more salt than usual?

40
Q

How to calculate PED?

A

% change in quantity demanded / % change in price

41
Q

How to calculate YED?

A

% change in quantity demanded / % change in income

42
Q

How to calculate XED?

A

% change in quantity demanded of good A / % change in price of good B

43
Q

XED substitute

A

if the XED of some goods is POSITIVE then they are substitutes because an increase in the price of one leads to an increase in the demand of another.

44
Q

XED complementary

A

If the XED of some goods is NEGATIVE then they are complementary because an increase in the price of one leads to a decrease in the demand of another

45
Q

XED of zero?

A

Unrelated goods, i.e. changes in the price of bananas has no relation to change of demand for slippers

46
Q

Law of supply

A

as price increases, quantity supplied increases

47
Q

Determinants of supply

A 
Costs of production 
Technology
Indirect taxes
Subsidies 
Exchange rates
Price of other goods 
No. Of suppliers
48
Q

How to calculate PES?

A

% change in quantity supplied / % change in price

49
Q

PES elastic

A

PES>1. Means producers can increase output without arising costs/ a time delay

50
Q

PES perfectly elastic

A

PES=infinity. Fall in price causes supply to fall to zero as firm is already selling at lowest possible price

51
Q

PES Unit elastic

A

PES=1. change in supply=change in price

52
Q

PES inelastic

A

between 0 and 1. Increase in supply is less than increase in price

53
Q

PES: Perfectly inelastic supply

A

change in price does not lead to a. change in supply because it is fixed e.g. auction goods

54
Q

Factors affecting PES

A 
Time taken to expand supply (length of production process)
Size of spare capacity 
Availability of stock
Ease of Switching production 
# of firms in the market

Micro Economics (5 decks)

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