Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics > Chapter 2- Price Determination In A Competitive Market > Flashcards

Chapter 2- Price Determination In A Competitive Market Flashcards

1
Q

Three functions of price?

A

…………………..:….if price increases
Rationing function- consumers are more rational
Incentive function- producers produce
More
Signalling function- entrepreneurs enter the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Define demand?

A

Demand is the amount that consumers are willing and able to buy at each given price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

When is there an extension in demand?

A

An EXTENSION in demand arises when price falls

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

When does a contraction in demand occur?

A

A contraction in demand is when there is an increase in price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Study diagram

A

Study diagram in book on demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the determinants of demand?

A
  • consumer tastes and preferences
  • prices of substitutes
  • prices of complementary goods
  • change in income
  • advertising and publicity
  • change in population
  • consumer confidence
  • change in quality
  • weather conditions
  • the law
  • uncertainty of future prices
  • fashion
  • interest rates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Define substitute?

A

A substitute is a replacement for another product

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Define complementary goods?

A

Complementary goods are goods that are consumed together

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Define normal goods?

A

Normal goods are goods and services that will see an increase in demand when income rises

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Define composite demand?

A

Composite demand is when a good is demanded for more than one purpose so that an increase in demand for one purpose reduces the supply for the other purpose

*graph is like a ppf one see book for an example

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Define derived demand?

A

Derived demand is when the demand for one good or service comes from the demand for another good or service

Eg if u demand more electronics, u demand more labour(in china)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Define price elasticity of demand?(PeD)

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Formula for ped?

A

Ped= %🔺Qd/%🔺P

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What does it mean when Ped is above 1?

A
  • If the number is above 1, the good has a PRICE ELASTIC DEMAND-> the bigger the number, the flatter the curve, the greater the elasticity
  • A FALL in price means quantity demanded RISES by PROPORTIONATELY MORE THAN THE PRICE CUT
  • A fall in price will lead to a increase in revenue because there will be a more than proportional change and so a big responsiveness
  • STUDY DIAGRAMS IN BOOK
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does it mean when Ped is between 0&1?

A
  • between 0&1 means the good has price inelastic demand.
  • when price falls, quantity demanded increases but by a SMALLER PROPORTION than the fall in price
  • demand is relatively unresponsive to price changes
  • when price falls, total revenue will FALL
  • there are more customers, but each one paying a proportionally lower price and therefore overall revenue falls.

*study diagrams

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Factors that determine Ped?

A
  • availability of substitutes-> more substitutes, more elastic
  • time eg out at pub and want to hire a taxi - at 3pm elastic but at night inelastic
  • whether the good is luxury (elastic but can be argued to be inelastic) or necessity (inelastic)
  • proportion of income spent on a good > if its a cheap good eg freddos then inelastic
  • habit forming products eg tobacco
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

When is Ped

1) perfectly inelastic
2) perfectly elastic
3) unitary elastic

A

1) perfectly inelastic is when PeD=0. 🔝
2) perfectly elastic is when PeD=infinity➖

3) Unitary elastic is when PeD=1
- directly proportional. its significance is that the percentage rise/fall in price is the same as the percentage fall/rise in quantity demanded and so total revenue is the same at each price

18
Q

PeD - how will the revenue depend on the elasticity of demand?

A

If price falls

  • If the product is inelastic, total revenue will decrease as its unresponsive and so quantity increases but BY A SMALLER PROPORTION than the FALL IN PRICE
  • If the product is elastic, revenue will quantity demanded RISES BY PROPORTIONALLY MORE THAN THE PRICE CUT and so is responsive. Total Revenue will increase

If price rises
Inelastic- rise in TR
Elastic- fall in TR

19
Q

Define YeD - income elasticity of demand?

A

The responsiveness of quantity demanded to a change in income

20
Q

Yed formula?

A

YeD= %🔺Qd / %🔺income(Y)

21
Q

For what values of YeD is it a:

1) normal good
2) inferior good

A

If YeD is positive it’s a normal good

If YeD is negative it’s an inferior good

22
Q

For what values of Yed is the good:

1) necessity
2) luxury

A

Necessity 1>yed>-1 (near 0)

Luxury above 1 eg 20 = very elastic

23
Q

Define XPed- Cross Price Elasticity of Demand?

A

A measure of the responsiveness of quantity demanded of one good to a change in the price of another good

24
Q

Formula of XPed?

A

%🔺in QD of good A ➗%🔺in price of good B

25
Q

What does it mean when XPed is POSITIVE?

A

When Xped is positive, the good is a SUBSTITUTE.

\+ve/+ve = if price of good B rises the demand of good A rises
-ve/-ve = if price of good B decreases the demand of A decreases

Big +ve = strong substitute
Small -ve = weak substitute

26
Q

What does it mean when XPed is NEGATIVE?

A

If XPed is negative, then the good is a COMPLEMENTARY product

+ve/-ve= if the price of good B decreases, the demand for good A increases

-ve/+ve= if the price of good B increases, the demand for good A decreases

Big-ve = strong compliment
Small -ve = weak compliments

27
Q

What does if mean when XPed is close to 0?

A

When XPed is close to 0 they are unrelated goods as there is 0 responsiveness

  • big numbers =elastic
  • small numbers= inelastic
28
Q

Define supply?

A

Supply is the amount offered for sale at each given price level

29
Q

When is there an extension and contraction in supply?

A

Extension in supply is when price INCREASES

Contraction is when price DECREASES

30
Q

What are the determinants of supply?

A

1) Prices of raw materials
2) technological improvements
3) changes in labour productivity
4) Regulation and bureaucracy(law)
5) Wage rates
6) Subsidies
7) Indirect taxes
8) Expectations about future prices
9) objectives of firms
10) Number of sellers in the market
11) joint supply

31
Q

Define joint supply?

A

When one good is produced another good is also produced from the same raw materials
Eg Beef and leather - anything with a by product

32
Q

Define Price Elasticity of supply (PeS)?

A

Measures the responsiveness of quantity supplied to changes in the price
Formula = %🔺in QS/ %🔺in P

*PeS is always going to be positive because as price increases firms produce more because they are profit maximising and they are rational(incentivising)

33
Q

For what values is PeS

1) perfectly inelastic
2) perfectly elastic
3) proportionally responsive

A

1) perfectly inelastic PeS=0🔝
2) perfectly elastic peS =infinity➖
3) proportionally responsive PeS =1 /

34
Q

What factors affect the price elasticity of supply?

A

-time (more time, more elastic)
- Raw materials need to be found, extracted, processed
-availability of stocks or stock piling (if low and difficult to store- inelastic
-the ease of switching between alternative production( if factors of production are easily moved from one production use to another then elastic if nit inelastic
- availability of spare capacity (if there is unused capacity, PeS elastic. If producing at capacity, PeS inelastic
- number of firms in the market and ease with which firms can enter a market(the easier,the flatter)
- ability to alter production methods(technology)
-

35
Q

Define equilibrium?

A

The price at which demand is equal to supply and there is no tendency to change

36
Q

Define disequilibrium?

A
  • the price at which the market supply does not equal demand

- there is likely to be a further change or reaction by buyers or sellers

37
Q

Define excess supply?

A

Excess supply is when quantity supplied at a particular price is greater than quantity demanded

38
Q

Define minimum price?

A

A price floor below which the price of a good or service is not allowed to decrease
Eg minimum wage

39
Q

Define excess demand?

A

When quantity demanded at a particular price is greater than quantity supplied

40
Q

Define maximum price?

A

A price ceiling above which the price of a good or service is not allowed to increase

Economics (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions