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Economics > Chapter 3 - Price determination in a competitive market > Flashcards

Chapter 3 - Price determination in a competitive market Flashcards

1
Q

Formula for PED

A

% Change Demand / % Change Price

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2
Q

Formula for YED

A

% Change Demand / % Change Income

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3
Q

Formula for XED

A

% Change Demand A / % Change Price B

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4
Q

Formula for PES

A

% Change Supplied / % Change Price

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5
Q

What is 0 PED

A

Perfectly Inelastic - Price no impact on demand

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6
Q

What is 0-1 PED

A

Inelastic - Price has little impact on demand

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7
Q

What is 1+ PED

A

Elastic - Price has lots impact on demand

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8
Q

What is ∞ PED

A

Perfectly Elastic - There is only one price - horizontal demand curve

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9
Q

What is 0 YED

A

Income has no impact on demand

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10
Q

What is 0-1 YED

A

Normal Necessity e.g. Bread

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11
Q

What is 1+ YED

A

Normal Luxury e.g. Holidays

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12
Q

What is 0 XED

A

No relationship

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13
Q

What is 0-1 XED

A

Weak relationship

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14
Q

What is 1+ XED

A

Strong relationship

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15
Q

What is 0 PES (Same as PED)

A

Perfectly Inelastic e.,g. Vertical supply curve

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16
Q

What is 0-1 PES (Same as PED)

A

Inelastic - steep supply curve. Little scope increase production in response to increase in price.

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17
Q

What is 1+ PES (Same as PED)

A

Elastic -shallow supply curve. Scope increase production. Spare Capacity & Stock.

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18
Q

What has positive PED

A

Veblen Goods only

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19
Q

What if PED is negative

A

Most goods have inverse relationship between price and Demand

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20
Q

What has positive YED

A

Normal Good - more income buy more

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21
Q

What has negative YED

A

Inferior Good - more income buy less (less income buy more)

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22
Q

What has positive XED

A

Substitutes e.g. Coca-Cola & Pepsi

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23
Q

What has negative XED

A

Complements e.g. Strawberries & Cream

24
Q

What does PED mean and what does it measure

A

Price elasticity of demand - Measures the sensitivity of the quantity demanded of a good to a change in its price

25
Q

What does YED mean and what does it measure

A

Income elasticity of demand - Measures the sensitivity of the quantity demanded of good to a change in consumer income

26
Q

What does XED mean and what does it measure

A

Cross price elasticity of demand - Measures the sensitivity of the quantity demanded of good X to a change in the price of good Y

27
Q

What does PES mean and what does it measure

A

Price elasticity of supply - Measures the sensitivity of the quantity supplied of a good to a change in its price

28
Q

What is the PES of most goods?

A

Positive

29
Q

What elasticity of demand are inferior goods always?

A

Negative YED

30
Q

How do you calculate the percentage change in quantity supplied of a good following a change in price

A

Multiply the percentage change in price

31
Q

What is an essential feature of an inferior good

A

YED is negative

32
Q

Indirect tax on the production of a good will have no effect on price if demand is what

A

Perfectly elastic

33
Q

What is a market?

A

A market is a voluntary meeting of buyers and sellers. It does not have to be a physical place.

34
Q

What are some factors of a competitive market

A
  • Large number of buyers and sellers
  • Good market information
  • Low barriers to entry and exit
  • Price takers
35
Q

What is Demand

A

Demand is the quantity of a product consumers are willing and able to buy at different prices in a specified time period

36
Q

What is effective demand

A

When a consumer’s’ desire to buy a product is backed up by an ability to pay for it

37
Q

What factors can affect demand

A
  • Consumer tastes and preferences
  • Income available to the customer
  • Prices of other goods and services ( Substitute and complementary goods)
  • Interest rates
  • Consumer population
38
Q

What is the income effect

A

at lower prices, consumers can afford to purchase more with their income

39
Q

What is the substitution effect

A

a fall in price makes one good relatively cheaper than a substitute

40
Q

What causes an outward shift in demand

A
  • Rise in real income
  • Increase in price of substitute good
  • Fall in price of complementary good
  • Change in consumer preference
  • Increase in population
  • Fall in interest rates
  • Rise in consumer confidence
  • Social changes that affect total demand for that product
41
Q

What is a substitute good and an example

A

Goods in competitive demand that can be replaced for another product e.g Buses and cars

42
Q

What is a complementary good and an example

A

Goods with joint demand, a rise in the price of a complement to good X should cause a fall in demand for X e.g iPhones and AirPods

43
Q

What changes demand for normal goods

A

Income (A rise in income= more demand, A fall in income= less demanded)

44
Q

Examples of inferior goods

A

Washing powder and pot noodles

45
Q

What is substitutability

A

Number of close substitutes for a good and the uniqueness of the product in the market

46
Q

What factors can determine whether a good is elastic or inelastic

A
  • Substitutability
  • The % of a consumers income
  • Is it a necessity or luxury
47
Q

What is supply

A

Supply 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

48
Q

What is the basic law of supply

A

the market price of a commodity rises, so producers expand their supply onto the market

49
Q

What causes a shift in market supply

A
  • Changes in production costs (Wages, price of raw materials, energy bills)
  • Government taxes and subsidies
  • Externtal shocks
  • Production technologies
  • New producers in market
  • Change in objectives
  • Change in substitute prices in production
50
Q

What is equilibrium

A

Demand and supply are the same

51
Q

What is equilibrium price also known as

A

Market-clearing price

52
Q

Why might market demand shift to the right

A
  • A rise in the price of a substitute or a fall in the price of a complement
  • An increase in consumers’ income or wealth
  • Changing consumer tastes and preferences in favour of the product
  • A fall in interest rates
  • A rise in consumer confidence
53
Q

Why might market supply shift to the right

A
  • A fall in the costs of production
  • A government subsidy to producers that reduces their costs for each unit supplied
  • A fall in the price of a substitute in production
  • improvement in technology (higher productivity and efficiency)
  • The entry of new suppliers (firms) into the market
54
Q

What is derived demand and an example

A

when a product is demanded for use in the production of another product. E.g the housing market (construction of new homes rises, so too does the demand for materials used)

55
Q

What is composite demand and an example

A

when you demand a good for more than one use. E.g crude oil is demanded for petrol and plastic

56
Q

What is joint supple and an example

A

when a rise in the output of one product leads to a rise in the supply of the other product E.g more Sheep supplies more wool, meat and skin

57
Q

What is latent demand and an example

A

willingness to purchase a good, but where the consumer lacks the real purchasing power to be able to afford the product E.g a yacht

Economics (11 decks)

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