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Micro > Competitive markets and how they work > Flashcards

Competitive markets and how they work Flashcards

1
Q

Define producer surplus

A

The difference between the price a producer is willing to accept and the market price actually received

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2
Q

Define consumer surplus

A

The difference between what a consumer is willing to pay for a good or service and what they actually paid for it

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3
Q

A fall in the market price leads to…

A

An increase in consumer surplus

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4
Q

Define demand

A

The quantity of a good or service that consumers are willing and able to purchase at a given price over a specified period of time

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5
Q

What are the determinants of demand?

A
  • Price of good or service
  • Price of substitutes
  • Prices of complements
  • Disposable income and wealth
  • Taste and fashion
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6
Q

In order to isolate the effect of just one determinant of demand, we can assume that…

A

All other determinants are constant (ceteris paribus)

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7
Q

What does the demand curve show?

A

The level of demand at each and every price

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8
Q

Why is the demand curve downwards sloping?

A

As the price falls, consumers become more willing and able to purchase the good or service

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9
Q

How would a change in the price affect demand?

A

If price falls, there is an extension of demand.
If price increases, there is a contraction of demand.
(known as the first law of demand)

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10
Q

How would a change in other determinants of demand affect demand?

A

A shift to right or left

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11
Q

What is supply?

A

The quantity of a good or service that producers are willing and able to sell at a given price over a specified period of time

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12
Q

What are the determinants of supply?

A
  • The price of the good or service
  • Changes in the costs of production
  • Government policies: indirect taxes and subsidies
  • Changes in technology
  • The weather/climate
  • Expectation of future prices and profits
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13
Q

What is a normal good?

A

A good with a positive income elasticity of demand

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14
Q

What is an inferior good?

A

A good for which an increase in income leads to a fall in demand

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15
Q

What is the formula for the price elasticity of demand?

A

% change in quantity demanded / % change in price

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16
Q

What does the PED measure?

A

It measures how responsive the quantity demanded of a product is to a change in it’s price

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17
Q

If PED is greater than 1..

A

It’s elastic

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18
Q

If PED is lower than 1..

A

It’s inelastic

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19
Q

When can demand be perfectly inelastic?

A

When PED = 0

  • Demand is completely unresponsive to changes in price
  • Demand curve would be parallel to the price axis
20
Q

If PED is perfectly elastic..

A

The demand curve is parallel to the quantity axis

21
Q

Define YED

A

The responsiveness of the quantity demanded to a change in income

22
Q

How is the YED measured?

A

% change in quantity demanded / % change in income

23
Q

The values of YED can be…

A

positive or negative

24
Q

A good with a positive YED is called…

A

Normal

25
Q

A good with a negative YED is called…

A

Inferior

26
Q

What factors determine the PED?

A

S - Availability of substitutes
H - Whether the consumption of the good or service is habitual
I - The proportion of income spent on the good/service
T - The time available to change buying patterns

27
Q

What are the limitations of the PED?

A
  • Does not show actual cause and affect
  • Data and statistics could be innacurate
  • Hard to predict consumers behaviour
28
Q

As income increases, demand for inferior goods…

A

decreases

29
Q

Define XED

A

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

30
Q

How is the XED measured?

A

% change in the quantity demanded of good A / % change in price of good B

31
Q

If the XED is positive..

A

The two products are subsitutes

32
Q

If the XED is negative..

A

The two products are complementary

33
Q

If two goods are substitutes, an increase in price of good B means the price of good A…

A

increases as well

34
Q

If two goods are complementary, an increase in the price of good B will mean the demand for good A…

A

Falls

35
Q

What does the size of the XED indicate?

A

The strength of the relationship between the two products

36
Q

What elasticity of demand is used to measure taste and fashion?

A

none - there is no way of measuring this

37
Q

What is PES?

A

Price elasticity of supply

38
Q

Define PES

A

The responsiveness of the quantity supplied to a change in the price of the product

39
Q

What is the formula for PES?

A

% change in Q supplied / % change in price

40
Q

If PES is greater than 1..

A

It is elastic, and supply is highly responsive to a change in price

41
Q

If PES is lower than 1..

A

It is inelastic, and supply is not very responsive to a change in price

42
Q

If PES = 0, its…

A

perfectly inelastic, a change in price has no effect on the QS

43
Q

Where is the equilibrium or market price set?

A

Where the demand curve intersects the supply

44
Q

What is allocative efficiency?

A

Where consumer satisfaction is maximised

45
Q

How does a market achieve allocative efficiency?

A

The market must function at the equilibrium position

Micro (5 decks)

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