Competitive Markets Flashcards
What are markets
Where goods and services are bought and sold
What are sub markets
Smaller markets that make up a market
What determine the levels of demand and supply in a market
Price charged and quantity sold
What is demand
The quantity of a good or service a consumer is willing and able to buy at a given price, at a particular time
What causes an contraction in demand
An increase in price
What causes an extension in demand
A decrease in price
What does it mean when a demand curve shifts left
Decrease in amount demanded at every price
What does it mean when a demand curve shifts right
An increase in amount demanded at every price
What causes shifts in demand curve
Changes in taste of people
Changes in real income
What are inferior goods
Goods that people demand less when real income increases
What are normal goods
Goods that people demand more when real income increases
What are substitute goods
Goods that are alternatives to eachother
E.g. increase in price in one will increase demand in the other and vice versa
What are complementary goods
Goods that are often used together
Joint demand
What is derived demand
Demand for a good or factor of production used in making another good or service
(E.g increase in demand for fencing -> increased derived demand for wood)
What is elasticity of demand
Measure of how much the demand for a good changes with a change in one of the key influences
What does PED (price elasticity of demand) measure
Measure of how the quantity demanded of a good responds to a change in its price
What is the PED equation
PED = percentage change in qty demanded / percentage change in price
What does it mean if PED > 1
It is elastic
A percentage change in price will cause a small percentage change in qty demanded
What does it mean when PED is between 0 and 1
It means it is inelastic
A percentage change in price will cause a larger percentage change in qty demanded
What does it mean when PED = 0
It is perfectly inelastic
Any increase in price has no effect on demand
What does it mean if PED = ± infinity
Perfectly elastic demand
Any increase in price will cause
What does it mean If PED = ± 1
Unit elasticity
The percentage changes are equal
What is income elasticity of demand
How much demand changes for a good with a change in real income
What is the formula for YED
YED = percentage change in quantity demanded for a good / percentage change in real income
What is cross elasticity of demand (XED)
Measure of how quantity demanded of one good responds to a change in price of the other
What is the formula for XED
XED = percentage change in quantity demanded of good A / percentage change in price of good B
What are the factors that influence elasticity of demand
- substitutes (the more substitutes, the more price elastic)
- type of good (e.g. essentials, cannot be postponed)
- percentage of income spent on good
What type of good has a positive YED
Normal goods
Incomes rise, demand increases
What type of good has a negative YED
Inferior goods
Incomes rise, demand falls
What type of good has a positive XED
Substitute goods
What type of goods have a negative XED
Complement goods
What are elasticities of demand useful for
Sales forecasting
Telling firms what to do in certain situations
What is supply
The quantity of a good or service thst producers supply to the market at a given price, at a particular time
What are marginal firms
Firms that are just breaking even
What causes shifts in supply
Changes in cost of production
Improvements in technology
Changes in the productivity of the factors of production
What is joint supply
When the production of one good or service involves the production of another
E.g. if the price of the product increases, then supply of it and any other join products increased
What does price elasticity of supply (PES) measure
Measure of how the quantity supplied of a good responds to a change in price
What is the formula for PES
PES = percentage change in quantity supplied / percentage change in price
Why is a high PES important to firms
Important as firms aim to respond quickly to changes in price and demand
So they must keep their supply elastic (PES >1)
What are perishable goods
E.g. fresh fruit
Inelastic supply as cannot be stored long
What is market equilibrium
When demand = supply
What do supply and demand determine in a free market
They determine the equilibrium
What is excess supply
When the quantity supplied to a market is greater than the quantity demanded
What is excess demand
When the demand for a good or service is greater than its supply
What is a competitive market
When there is a large number of buyers and sellers
No single consumer or producer can influence the allocation of resources by the market
What is a price mechanism
The means by which decisions of consumers and businesses interact to determine the allocation of resources
What is consumer surplus
The difference between the price that a consumer is willing to pay for a good and the price that they actually pay
E.g. someone is prepared to pay £10 for a good and bought it for £8 then that is a consumer surplus of £2.
What is producer surplus
The difference between the price a producer is willing to supply a good or service at and the price they actually receive for it
E.g. equilibrium price of a good is £15, but a supplier is able to sell it for £10. The producer surplus is £5
Is price elastic or inelastic in the short run
Price inelastic
Difficult to increase production in short run as capital is fixed
