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A-Level Economics > Competitive Markets > Flashcards

Competitive Markets Flashcards

1
Q

What is a market?

A

A market is anywhere buyers and sellers can exchange goods or services.

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2
Q

What is demand?

A

Demand is the quantity of a good/service that consumers are willing and able to buy at a given price, at a particular time.

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3
Q

What does a demand curve show?

A

The relationship between price and quantity demanded.

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4
Q

Why is a demand curve downwards sloping?

A

The demand curve is downwards sloping due to the fact that it is negatively correlated with price - as price increases, demand decreases.

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5
Q

On an economic diagram, what is the y and x axis?

A

Y is ‘price’ and X is ‘quantity’.

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6
Q

Movement along the demand curve is determined by price - assuming ceteris paribus.

If the movement along the demand curve is left, is demand decreasing or increasing?

A

Decreasing

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7
Q

Movement along the demand curve is determined by price - assuming ceteris paribus.

If the movement along the demand curve is right, is demand decreasing or increasing?

A

Increasing

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8
Q

Changes in demand for a product causes demand to do what on a graph?

A

Demand will shift to either the left (decrease) or the right (increase).

This is because when demand changes, the quantity demanded changes at every price level.

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9
Q

Give two reasons for why a shift in a demand curve can occur.

A

Changes in fashion - if your good or service becomes less trendy or popular individuals may not buy it as much anymore so quantity demanded falls at all price levels.

Changes in income - the amount of goods/services that a consumer can afford to purchase with their income can affect the demand for different types of goods.

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10
Q

Describe a normal good.

A

Normal goods (0 < YED < 1) is generally the most popular type of good in an industry.

It’s YED is positive, so an increase in income follows an increase in demand, and a decrease in income follows a decrease in demand.

However, changes in demand as a result of decreasing or increasing income are not as sensitive as luxury goods.

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11
Q

Describe an inferior good.

A

Inferior goods (YED < 0) are types of goods which have a negative YED.

This means that when income increases, demand decreases as individuals will be able to afford higher quality products and when income decreases, demand increases as individuals move to cheaper, necessary options as a result of having less money.

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12
Q

Describe a luxury good.

A

Luxury goods (YED > 1) are types of goods that generally reflect an individuals wants.

Luxury goods YED is over 1, and this is due to the fact that luxury goods fluctuate in demand much more sensitively than normal goods following a change in income. When income increases, demand increases dramatically, and when income decreases, demand decreases dramatically.

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13
Q

Changes in demand in one market can affect demand in other markets.

Give 3 types of instances wherein demand for one product can change due to the behavior of another.

A

Substitute goods (XED > 0) refer to two different products in two different markets that are similar to each other, such as beef and lamb. The increase in price of beef generally causes an increase in the demand for lamb - they are in competitive demand with each other.

Complementary goods (XED < 0) refer to two products that are generally bought together, the intensity of which is expressed in the XED value (further away from 0 are usually more complementary). An example of this are ps4 consoles and ps4 games - the increase in the price for ps4 consoles will generally cause a decrease in the quantity demanded for ps4 games - they are in joint demand with each other.

Derived demand refers to demand for a good or factor of production which occurs due to the demand for something else.

Composite demand happens when goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other. E.g. milk which can be used for cheese, yoghurts, cream, butter and other products. If more milk is used for manufacturing cheese (ceteris paribus), there is less available for butter.

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14
Q

Cheese and crackers are complementary goods. Explain the likely impacts on the demand for crackers if the price of cheese dramatically increases.

A

Firstly, complementary goods are goods that are generally bought together by consumers. The increase in price of one good will decrease the demand of the other, as consumers may not find it useful to buy the initial product to combine with the other one.

So, applying this to cheese and crackers, the impact of the demand for crackers from the increase in price of the cheese would make crackers demand fall, however, the demand for crackers will still persist due to the fact that individuals will still want to buy crackers regardless of if it’s with cheese.

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15
Q

Give the formula for PED.

A

The % change in QD / % change in P

i.e. -10 / 2 = -5

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16
Q

When the price of a toy car increased from 50p to 70p the demand for them fell from 15 cars to 10 cars.

Find the PED.

A

Firstly percentage change from 50 to 70 is 20 / 50 = 0.4 - there’s a percentage change of 40%

15 cars to 10 cars is a percentage change of -33.3333%

% change in qd / % change in p

-33.3333 / 40 = -0.83333

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17
Q

The price of chococakes was reduced from 3 to 1.5, causing an increase in demand from 200 to 400. What is the PED for chococakes?

A

3 to 1.5 is a 50% decrease (-50%)
200 to 400 is a 100% increase

% change in qd / % change in p

100 / -50 = -2

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18
Q

What must the PED of relatively elastic goods be at?

A

Over 1 - PED > 1

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19
Q

What must the PED of relatively inelastic goods be at?

A

Under 1 - PED < 1 but over 0

0 < PED < 1

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20
Q

Describe perfectly elastic demand.

A

Perfectly elastic demand has a PED of infinity and any increase in price means that demand will fall to zero.

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21
Q

Draw a perfectly elastic demand curve.

A

https://media.discordapp.net/attachments/352951793187029005/819656233182036009/unknown.png?width=634&height=564

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22
Q

Draw an elastic demand curve.

(this is relatively unscientific, so just make it seem really obvious that it’s elastic).

A

https://media.discordapp.net/attachments/352951793187029005/819656636074557520/unknown.png?width=635&height=564

This graph is wrong! D is elastic but is drawn as a supply curve… Make sure yours was negatively correlated to price

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23
Q

Draw an inelastic demand curve.

(this is relatively unscientific, so just make it seem really obvious that it’s inelastic).

A

https://media.discordapp.net/attachments/352951793187029005/819656785232527440/unknown.png?width=624&height=563

The curve is inelastic however is drawn as a supply curve. Make sure yours was drawn as a demand curve (as the curve shown in the image is positively correlated to price)

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24
Q

Draw a perfectly inelastic demand curve.

A

https://media.discordapp.net/attachments/352951793187029005/819657036022284308/unknown.png?width=646&height=564

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25
Q

Describe perfectly inelastic demand.

A

Perfectly inelastic demand has a PED of 0 and means that price has no effect on the quantity demanded.

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26
Q

What is unit elasticity of demand?

A

Unit elasticity of demand refers to when a change in price causes the proportionate change in quantity demanded.

In other words, the percentage change in price is equal to the percentage change of the change in quantity demanded, therefore PED = 1.

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27
Q

A toy cars price increased from 50p to 70p. This caused an increase in demand from 15 cars to 21 cars.

Calculate the PED. What type of PED is this?

A

Difference between 50 and 70 = 20 so divide 20 by 50 to get 0.4. a 40% change in price

Difference between 15 and 21 = 6 so divide 6 by 15 to get 0.4, a 40% change in price.

40 / 40 = 1.

Unit elastic.

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28
Q

Give the formula for YED.

A

% change in quantity demanded / % change in real income.

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29
Q

If real incomes increased by 10% and because of this the demand for cameras increased by 15%, the YED for cameras would be what?

What type of good is the camera - luxury, inferior or normal?

A

% change in demand / % change in real incomes

15 / 10 = 1.5

YED = 1.5 - this is a luxury good.

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30
Q

A good with YED < 0 is known as what?

A

Inferior good

31
Q

A good with 0 < YED < 1 is known as what?

A

Normal good

32
Q

A good with YED > 1 is known as what?

A

Luxury good.

33
Q

Describe XED, as well as the formula.

A

XED = % change in quantity demanded of good A / % change in price of good B

XED, also known as the cross price elasticity of demand, refers to the change in the price of one good as the result of the change in quantity demanded of another.

34
Q

A good with XED < 0 is known as what?

A

Complementary.

35
Q

A good with XED > 0 is known as what?

A

Substitutes.

36
Q

The price of toy cars rise by 40% and the demand for teddy bears increase by 20%.

Calculate the XED and state what type of goods they are.

A

% change in demand of good A / % change in price of good B

20 / 40 = 0.5

Substitutes.

37
Q

The price of tennis rackets rose by 50%, causing the demand for tennis balls to fall by 30%.

Calculate the XED and state what type of goods they are.

A

% change in demand of good A / % change in price of good B

-30 / 50 = -0.6

Complementary.

38
Q

Give two factors that can influence the Price Elasticity of Demand.

A

Firstly, the availability of similar substitutes in the market can influence the price elasticity of demand. if there are more substitutes to a particular product, then when the products price increases consumers will find it easier to switch to other products, therefore making the change in demand more sensitive.

The type of good can also influence PED - for example, habit-forming goods are often price inelastic and essential items, such as toilet paper and water are also often price inelastic.

As well as this, the % of income spent on a single good can influence PED, as if the % of income spent on a single good is higher than usual, the consumer may pay more time to look for substitutes or the next possible option, becoming more price elastic as it impacts their income.

39
Q

Describe the characteristics of a good with elastic demand.

A

A good with elastic demand will face a decrease in total revenue when the price increases.
A good with elastic demand will face an increase in total revenue when price decreases.

This is due to the fact that goods with elastic demand mean that a change in price will cause a more sensitive change in demand in the opposite direction.

As a result, when price decreases, the demand will increase more, increasing total revenue while the opposite happens when demand decreases as a result of price increasing.

40
Q

Describe the characteristics of a good with inelastic demand.

A

A good with inelastic demand will face a decrease in total revenue when the price decreases.
A good with inelastic demand will face an increase in total revenue when the price increases.

This is due to the fact that goods with inelastic demand often mean that changes in price causes a less sensitive change in demand.

As a result, when price increases, the demand dropping will be decrease less, making total revenue increase. When price decreases, the demand increasing will increase less, making total revenue decrease.

41
Q

What is Supply?

A

Supply is the quantity of a good or service that producers supply to the market at a given price, at a particular time.

42
Q

Describe the relationship between supply and price.

A

Supply and price are positively correlated. This means that an increase in price increases the quantity supplied for the good, and inversely, a decrease in price decreases the quantity supplied for the good.

43
Q

Is a supply curve upwards or downwards sloping?

A

Upwards

44
Q

Give 3 factors that can cause a shift in the supply curve.

A

Changes to the costs of production - for example, costs of production being cheaper means that firms can produce more goods from the same cost, shifting supply to the right and increasing quantity supplied at all price levels.

Improvements in technology - more efficient technology means the costs of production decrease, meaning that you can supply more from the same price and therefore supply shifts to the right.

Changes in productivity of factors of production - for example, the labor employed in your firm becoming more productive means that you get more output produced from each worker on average - you are getting more out of each worker and therefore supply shifts to the right.

Subsidy - subsidies decrease costs of production therefore you are able to supply more for the same price as before. This means that supply shifts to the right

45
Q

What is Joint Supply?

A

Joint supply refers to when the production of one good is necessary for the production of two or more other outputs.

For example, cows can be used for multiple different goods, i.e. hide, beef and milk.

46
Q

Give the formula for the price elasticity of supply.

A

% change in quantity supplied / % change in price

47
Q

The price of a smartphone increased from £449 to £485. The supply then increased from 15,000 to 21,500.

Calculate the PES.
Elastic or inelastic?

A

449 to 485 is an increase of 36
wherein the response was 15,000 to 21,500 which is an increase of 6,500

36 / 449 = 8%
6,500 / 15,000 = 43.33%
% change in quantity supplied / % change in price

43.33 / 8 = 5.42 - Elastic

48
Q

What is the PES value for a relatively elastic supply curve?

A

PES > 1

49
Q

What is the PES value for a relatively inelastic supply curve?

A

0 < PES < 1

50
Q

Price increases from £5 to £7 and units supplied go from 2 to 9.

Calculate the PES.
Elastic or inelastic?

A

£5 to £7 - 2
2 to 9 - 7

7 / 2 = 3.5 (350%)
2 / 5 = 0.4 (40%)

% change in quantity supplied / % change in supply

350 / 40 = 8.75 - Elastic.

51
Q

Price increases from £2000 to £6000, which makes quantity supplied increase from 2000 to 4000.

Calculate the PES.
Elastic or inelastic?

A

2000 -> 6000, increase of 4000
2000 -> 4000, increase of 2000

4000 / 2000 = 2
2000 / 2000 = 1

% change in quantity supplied / % change in supply

100 / 200 = 0.5 - Inelastic.

52
Q

What is unit elasticity of supply?

A

Unit elasticity of supply refers to when the percentage change in price is equal to the percentage change in quantity supplied.

53
Q

What PES is unit elasticity of supply?

A

1

54
Q

A firm wants to increase its quantity supplied. The factory wherein they produce has spare production capacity.

Is the PES likely to be high or low?

A

PES is likely to be high due to the fact that you will not carry on extra costs (for expanding the capacity of the factory).

55
Q

Describe the characteristic of a product with a PES of over 1 if a firm wishes to increase the quantity supplied of the product..

A

If supply is elastic (i.e. PES > 1), then producers can increase output without a large rise in cost or a time delay.

As a result of this, price does not have to increase or decrease as much to meet the new quantity supplied - thus a change in demand can be met without a large change in price.

56
Q

Describe the characteristic of a product with a PES of under 1 and over 0 if a firm wishes to increase the quantity supplied of the product..

A

If supply is inelastic (i.e. PES < 1), then producers face problems when increasing the quantity supplied of the product, maybe due to the fact that the factory has reached maximum capacity and time is needed for expansion, so extra costs rise.

As a result of this, price of the good has to reach much more to meet the new quantity supplied - thus a change in demand can’t be met without a large change in price..

57
Q

Describe what happens to the quantity supplied of a product at a PES of 0 when price increases.

A

Perfect inelastic supply is when the PES formula equals 0. This means that there is no change in quantity supplied when the price changes.

This means that the quantity supplied for the product will not increase when price increases - it stays the same.

58
Q

Describe what happens to the quantity supplied of a product at a PES of infinity when price increases.

A

The PES for perfectly elastic supply is infinite, where the quantity supplied is unlimited at a given price, but no quantity can be supplied at any other price.

This means that when price increases, the quantity supplied of the product falls to 0, it cannot be supplied anymore.

59
Q

When is a market in equilibrium?

A

When supply = demand

60
Q

Where can the equilibrium point be found on a graph?

A

Where the demand curve and the supply curve meet

61
Q

When is a market in disequilibrium?

A

When supply is not = to demand

62
Q

A to C shows the supply and demand for a teddy bear at various prices.

A - 1,000 quantity demanded, 7000 quantity supplied
B - 4,000 quantity demanded, 4,000 quantity supplied
C - 1,000 quantity demanded, 7,000 quantity supplied

Which one shows the equilibrium point?

A

B - supply = demand

63
Q

A good has a price elasticity of supply of +0.8.

At present, the quantity supplied of the good is 200 units per week at a market price of £800 per unit.

If the price rises to £1000 per unit then the quantity supplied per week would be what?

A

Firstly, the PES is +0.8 meaning the change in supply is the (% change in price) * 0.8 and it increases.

1000 / 800 = 1.25. 25% increase
25 * 0.8 = 20(%). This is how much supply increases

200 x 1.2 = 240.

64
Q

The price of a teddy bear is set over the equilibrium price.

The equilibrium price, the price that is set where demand and supply meet, is £40. Price rises to £60 artificially.

Would the good be in excess supply or excess demand?

A

Excess supply

Price is positively correlated with supply and so an increase in price comes with an increase in supply, while demand decreases. This means that the good will be supplying much more quantity than what is demanded.

65
Q

What is excess supply?

A

Excess supply refers to when quantity supplied > quantity demanded.

66
Q

What is excess demand?

A

Excess demand refers to when quantity demanded > quantity supplied.

67
Q

Draw a graph showing excess demand.

A

https://media.discordapp.net/attachments/352951793187029005/820371318683336724/unknown.png?width=626&height=564

68
Q

Draw a graph showing excess supply.

A

https://media.discordapp.net/attachments/352951793187029005/820371134822219876/unknown.png?width=644&height=563

69
Q

Shifts in demand or supply curves will change the market equilibrium.

Describe what happens to the market equilibrium when demand shifts to the right with help of a graph.

A

Demand shifting to the right from D to D1 will cause the price to increase from Pe to P1 which causes supply to extend from Qe to Q1, creating a new equilibrium between demand and supply.

https://media.discordapp.net/attachments/352951793187029005/820383219509100544/unknown.png?width=731&height=563

70
Q

Describe the following from the graph:

https://media.discordapp.net/attachments/352951793187029005/820400997217206272/unknown.png?width=554&height=563

The PED of:

Prices 10 to 9 (Describe the PED of price 10 as proven by your calculation)
Prices 9 to 8
Prices 6 to 5
Prices 2 to 1
Describe the type of PED being shown at price 0

Describe what is shown in the bottom graph with help from your results.

A

Firstly, at a P of 10, the quantity given is 0 - when price decreases to 9, the quantity demanded is 1.

Calculating the PED of this:
10 to 9 is a change of -1, -1/10 = -0.1 (-10%)
0 to 1 is a change of +1, 1/0 = undefined.

PED of 10 is therefore perfectly elastic at the very top of the demand curve - the PED is infinity, undefined.

Secondly, at the P of 9, the quantity given is 1 - when price decreases to 8, the quantity demanded is 2.

Calculating the PED of this:
9 to 8 is a change of -1, -1/9 = -0.11111 (-11.11111%)
1 to 2 is a change of +1, 1/1 = 1 (100%).

100 / -11.1111 = -9

PED near the top of the demand curve is therefore relatively elastic.

Thirdly, at the P of 5, the quantity given is 4 - when price decreases to 5, the quantity demanded is 5.

Calculating the PED of this:
6 -> 5 is -1, -1/6 = 0.1666667 (-16.666667)
4 -> 5 is +1, 1/4 = 0.25 (+0.25)

25 / -16.6666667 = -1.5

This is near unit elastic PED and the price of 5 with the quantity produced of 5 is the location of unit elasticity within the demand curve.

Finally, at the P of 2, the quantity given is 8 - when price decreases to 1, the quantity demanded is 9.

Calculating the PED of this:

2 -> 1 = -1, -1/2 = -0.5
8 -> 9 = +1, 1/8 = 0.125

12.5 / -50 = -0.25

PED is relatively inelastic at this part of the demand curve.

To add, at the P of 0, the quantity demanded is 10 (basically all the items that can be sold). This is perfectly inelastic, PED = 0.

Now onto the bottom graph:

At PED of infinity, the output sold will be 0 and total revenue will be at 0 - reducing price will then increase revenue for the firm at this point, while an increase in price will just damage the firm’s total revenue even more.

At PED of -9, known as elastic, the total revenue will be very low, so will the output sold but they will not be at 0. A reduction in price will increase total revenue and a further increase in price will reduce the firms total revenue.

At PED of -1.5, the demand curve is near unit elasticity and so the total revenue will be much higher but not as high as it can be and output sold will be nearing the middle. A reduction in price is needed for higher total revenue.

At a PED of -0.25, known as relatively inelastic, the firm must increase the price in order to increase total revenue, with a reduction decreasing total revenue - they have passed the unit elastic point and are selling a lot of output.

At a PED of 0, known as perfectly inelastic, the price is 0, meaning that any individual can buy the item and all quantity will be sold with no total revenue. An increase in price is needed to increase total revenue.

71
Q

What is derived demand?

A

Derived demand refers to demand for a good or factor of production which occurs due to the demand for something else.

72
Q

Give an example of goods which are in competitive demand.

A

Substitutes, i.e. beef and lamb.

73
Q

Give an example of goods which are in joint demand.

A

Complementary goods, i.e. PS4 games and PS4 consoles.

74
Q

What is composite demand?

A

Composite demand refers to when goods or services have more than one product/use so that an increase in the demand for product leads to a fall in supply of the other. E.g. milk which can be used for cheese, yoghurts, cream, butter and other products - if more milk is used for manufacturing cheese (ceteris paribus), there is less available for butter.

A-Level Economics (15 decks)

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