Ch.2 Price Determination In A Competitive Market Flashcards
What is a market?
A situation in which buyers and sellers come together to engage in trade. Both buyers and sellers have to be willing partners to the exchange.
What is a competitive market?
A situation where there is a large number of potential buyers and sellers with abundant information about the market. Each individual buyer and seller are powerless to influencing the ruling market price. The ruling market price (equilibrium price) is determined by supply and demand. A highly competitive market also lacks barriers to entry and exit.
What is the equilibrium price?
The price at which the planned demand of consumers equals the planned supply of firms.
What are the determinant of the demand for goods and services?
Demand and effective demand.
What is demand?
The quantity of a good or service that consumers are willing and able to buy at given prices in a particular time period..
What is effective demand?
The consumers desire to buy a good backed up by the ability to pay.
What is supply?
The quantity of a good or service that firms are willing and able to sell at a given price in a given period of time.
What does the law of demand state?
The law of demand states that as the price of a good or service falls, the the quantity demanded increase. This is an inverse relationship.
What are the assumptions made when analysing the effects of a change in price on the quantity demanded?
We assume that all other possible determinants of demand are held constant. Economics refer to this assumption as “ceteris paribus”. An increase in the quantity demanded resulting from a fall in price is known as an extension of demand, a fall in quantity demanded resulting from an increase in price is known as a contraction of demand.
How do households and firms operate simultaneously in two sets of markets?
Consumers buy goods and services produced and supplied by firms. However, for household demand in the goods market to be in effective demand, households must first sell their labour, or possibly the services of any capital or land they own, in the markets for factors of production.
What is market demand?
The quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices.
What is individual demand?
The quantity that a particular individual would like to buy.
What causes a demand curve to shift?
Factors that may lead a demand curve to shift are the conditions of demand.
What are the conditions for demand?
Factors other than the price of the food that lead to a change in position of the demand curve.
What do the conditions of demand include?
Real disposable income (the incomes of individuals after the effects of inflation, taxation and benefits are taken into account.
Tastes and preferences (the popularity of goods and services is often influenced by changes in society’s preferences and may be influenced by the media, advertising and technological change).
Population (the size, age and gender composition of the population will affect the market size for many products).
Prices of substitute products (substitute products are those in competitive demand that may be seen as close alternatives to a particular good or service).
Prices of complementary products (complementary products are this’d in joint demand, I.e. Demanded together with other goods and services).
What is the definition of taxation?
A charge placed by the government on various forms of economic activity. Most taxes are on forms of income and types of spending.
What is a substitute good?
A good that may be consumed as an alternative to another good.
What is a complementary good?
A good that tends to be consumed together with another good.
What is a normal good?
A good for which demand increases as income rises and demand decreases as income falls.
What is an inferior good?
A good for which demand decreases as income rises and demand increases as income falls.
How are inferior and normal goods dependent?
For an individual, whether a good is normal or inferior depends on personal income, tastes, and possibly age. For a child, junk food and sweets is normally a normal good, but as children get older, tastes change, and sweets may very well become an inferior good.
What is elasticity?
The proportionate responsiveness of a second variable to an initial change in the first variable.
What is price elasticity of demand?
The responsiveness of quantity demanded of a good time a change in price. The formula for price elasticity of demand is percentage change in quantity demanded divided by percentage change in price. The value for price elasticity of demand is usually negative because of the assumed inverse relationship between price and quantity demanded.
How is price inelastic demand shown?
When demand for a product is price inelastic, the value of PED is between 0-1, ignoring the minus sign.
How is price elastic demand shown?
When demand for a product is price elastic, the value of PED is greater than 1, ignoring the minus sign.
How is a relatively inelastic good represented on a graph?
On the x axis is the quantity sold (in a time frame) and the y axis is price (£). The line on the graph will be mostly or the majority more verticale, showing that a change in price will not have a large effect on the quantity demanded.
How is a relatively elastic good represented on a graph?
With price on the y axis and quantity sold on the X axis the graphs line is relatively horizontal, showing that a small change in price can lead to a large change in quantity sold.
