Competitive Markets

Question 1

What’s demand?

Answer 1

Is the quantity of a good/service that consumers are willing and able to buy at a given price.

Question 2

What does a demand curve show?

Answer 2

It shows the relationship between price and quantity demanded.

Question 3

In a demand curve, what does a decrease and increase in price cause?

Answer 3

A decrease in price causes a extension in demand while an increase in price causes a contraction in demand.

Question 4

Explain income effect:

Answer 4

Assumes a fixed level of income, the income effect means that as a price falls the amount that consumers can buy with their income increases and so demand increases.

Question 5

Explain the substitution effect:

Answer 5

A fall in price of a good makes it relatively cheaper than other goods, so consumers will increase demand for the cheaper good and reduce demand for the expensive good.

Question 6

What are the factors that can cause a shift in the demand curve?

Answer 6

Population
Advertising
Substitutes price
Income
Fashion/Tastes
Interest rates
Complement price

Question 7

Equation for PED.

Answer 7

% change in QD
—————————
% change in price

Question 8

Define PED.

Answer 8

Measures the responsiveness of quantity demanded given a change in price.

Question 9

Define YED.

Answer 9

Measures the responsiveness of quantity demanded given a change in income.

Question 10

Equation of YED?

Answer 10

% change QD
———————————
% change in income

Question 11

Define XED.

Answer 11

Measures the responsiveness of quantity demanded of a good/service given a change in price of another.

Question 12

Equation for XED?

Answer 12

% change in QD
——————————
% change in price

Question 13

What is supply?

Answer 13

The quantity of a good/service producers are willing and able to produce at a given price in a given time period.

Question 14

What does a supply curve show?

Answer 14

A supply curve shows the relationship between price and quantity supplied.

Question 15

Factors that cause a shift in the supply curve.

Answer 15

Productivity 
Indirect Tax
Number of firms
Technology
Subsidy
Weather
Cost of production

Question 16

What cause a contraction on supply?

Answer 16

A decrease in price.

Question 17

What is joint supply?

Answer 17

Where the production of one good or service involves the production of another.

Question 18

What’s composite supply?

Answer 18

Where a demand for a product can be satisfied by the supply of two or more goods that are substitutes for each other- tea and coffee

Question 19

What is competitive supply?

Answer 19

Where two or more alternative goods can be produced from the same factors of production.

Question 20

define PES.

Answer 20

Measures the responsiveness of quantity supplied given a change in price.

Question 21

Equation for PES.

Answer 21

% change in QS
——————————-
% change in price

Question 22

Why is supply more elastic in the long run?

Answer 22

In long run, all factors are variable - so in the longs run a firm can increase its capacity as it has longer to react to changes in price and demand

Question 23

What are factors that affect PES.

Answer 23

Production Lag
Stocks
Spare capacity
Substitutability of FoP
Time

Question 24

What’s the market equilibrium?

Answer 24

Where demand = supply

Question 25

What’s excess supply?

Answer 25

When the quantity supplied to a market is greater than the quantity demanded.

Question 26

What’s excess demand?

Answer 26

When the demand for a good/ service is greater than its supply.

Question 27

When is there a competitive Market?

Answer 27

When there are a large number of buyers and sellers.

Question 28

What’s the three functions for the price mechanism?

Answer 28

Acts as a incentive to firms Acts as a signalling device Acts to ration scarce resources

Question 29

What are the 4 advantages of price mechanism?

Answer 29

Resources will be allocated efficiently to satisfy consumer wants and needs. Consumers decide what is and isn’t produced by producers. Prices are kept to a minimum as resources are used as efficiently as possible.

Question 30

What are the 4 disadvantages of price mechanism?

Answer 30

Inequality in wealth and income is likely. Under provision of merit goods and over provision of demerit goods as supply and demand for these goods won’t be at socially optimal level. People with limited skills will suffer unemployment. Public goods won’t be produced.

Question 31

What’s the consumer surplus?

Answer 31

The difference between the price consumers are willing and able to pay for a good/service and the price that is actually paid.

Question 32

What’s producer surplus?

Answer 32

The difference between the price producers are willing and able to supply for a good/service and the price they actually they receive.

Question 33

Where would consumer surplus be on a diagram?

Answer 33

Below demand curve and above price line.

Question 34

Where is Producer surplus on a diagram?

Answer 34

Above supply curve and below price line