Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

A-Levels > E - 3) Price determination in a competitive market > Flashcards

E - 3) Price determination in a competitive market Flashcards

1
Q

What is effective demand?

A

Demand supported by intention and ability to buy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is latent demand?

A

Willingness to buy, but not yet ability to buy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is joint/complimentary demand?

A

Demand for one good is closely linked to the demand for another - two or more goods that go well together

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is derived demand?

A

When demand for one product drives the demand for another

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is composite demand?

A

Good is demanded for more than one use

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is individual demand?

A

A consumer’s demand for a good or service

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is market demand?

A

All consumers’ demands in the market summed together

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the types of movement along the demand curve and why do they occur?

A
  • Extensions: movement to the right - quantity demanded increases due to fall in price
  • Contractions: movement to the left - quantity demanded decreases due to rise in price
  • Due to the law of demand - as price falls/rises, quantity demanded increases/decreases (when ceteris paribus applies)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is ceteris paribus?

A
  • All other influencing factors are held constant
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What factors cause shifts in demand?

A

Changes in:

  • Tastes / preferences
  • Incomes
  • Prices of related goods (complements and substititues)
  • Size and structure of population
  • Interest rates
  • Law
  • Expectations
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Why does the demand curve slope downwards?

A
  • Substitution effect - consumers substitute in favour of the good that becomes relatively cheaper
  • Real income effect - if the price falls, the consumer will gain purchasing power. This extra ‘income’ available for spending can be used to buy more of the good
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Why might consumers be irrational in terms of demand?

A
  • Bounded rationality and bounded self-control
  • Biases in decision making: rules of thumb, anchoring, availability, social norms
  • The importance of altruism and perceptions of fairness
  • Choice architecture and framing
  • Nudges
  • Default choices, restricted choice and mandated choice
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is price elasticity of demand (PED) and its formula?

A

The responsiveness of quantity demanded of a good, to a change in its price

PED = %∆ in quantity demanded ÷ %∆ in price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Why is PED negative?

A

Because the quantity demanded is inversely related to the price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the types of PED, and their values and gradients?

A
  • Perfectly inelastic: PED = 0 | Gradient = vertical
  • Inelastic: PED = 0 <—> -1 | Gradient = steep
  • Unitary: PED = -1 | Gradient = diagonal
  • Elastic: PED = -1 <—> -∞ | Gradient = shallow
  • Perfectly elastic: PED = -∞ | Gradient = horizontal
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is PED like along straight-line demand curves?

A
  • NOT the gradient of the curve
  • Varies all the way along the curve
  • = -1 at mid-point of curve
  • Inelastic at low prices
  • Elastic at high prices
17
Q

What is total revenue like at different PEDs?

A

When PED is inelastic:

  • Rise in price leads to less than proportionate fall in quantity demanded - total revenue increases
  • Fall in price leads to less than proportionate rise in quantity demanded - total revenue decreases

When PED is elastic:

  • Rise in price leads to more than proportionate fall in quanitity demanded - total revenue decreases
  • Fall in price leads to more than proportionate rise in quantity demanded - total revenue increases

When PED is unitary:

  • Rise in price leads to equally proportionate fall in quantity demanded - total revenue remains unchanged
  • Fall in price leads to equally proportionate rise in quantity demanded - total revenue remains unchanged
18
Q

What factors affect PED?

A
  • Availability of close substitutes
  • Cost of switching suppliers
  • Breadth of product definition
  • Degree of necessity
  • Time frame when making choice
  • Brand loyalty
  • Percentage of income spent on product
  • Habitual demand
19
Q

What are uses of PED?

A
  • Determination of pricing policy / impact on revenue
  • Indication of competition faced (number and closeness of substitutes)
  • Price setting in price discrimination
  • Government decision on which goods to tax indirectly
20
Q

What is income elasticity of demand (YED) and its formula?

A

The responsiveness of demand for a good, to a change in income
YED = %∆ in demand ÷ %∆ in income

21
Q

What types of goods have positive and negative YEDs?

A
  • Positive YED: normal goods - when income rises, quantity demanded increases
  • Negative YED: inferior goods - when income rises, quantity demanded decreases
22
Q

What are the types of goods and their values of YED?

A
  • Inferior goods: -∞ <—> 0
  • Necessity (normal) goods: 0 <—> 1
  • Luxury (normal) goods: 1 <—> ∞
23
Q

What are normal and inferior goods with examples?

A

Normal goods:

  • Products or services for which demand increases as consumer income rises
  • When people’s incomes go up, they tend to buy more of these goods
  • Examples: restaurant meals, holidays, higher-end electronics

Inferior goods:

  • Products or services for which demand decreases as consumer income rises
  • When people’s incomes increase, they typically buy less of these goods and may shift to higher-quality alternatives
  • Examples: lower-quality or generic foods, used or older-model cars, certain low-cost generic products
24
Q

What are uses of YED?

A
  • Effect of recession / growth on demand
  • Business planning for product range
  • Helps firms anticipate future demand
25
Q

What is cross elasticity of demand and its formula?

A

The responsiveness of demand for a good, to a change in the price of a related good
XED = %∆ in demand for good A ÷ %∆ in price of good B

26
Q

What types of goods have positive and negative XEDs?

A
  • Positive XED: substitute goods - when price of good B rises, demand for good A increases (and vice versa)
  • Negative XED: complementary goods - when price of good B rises, demand for good A decreases (and vice versa)
27
Q

What are subsititues and complements with an example?

A
  • Substitutes: goods that can be used in place of each other to satisfy a similar need or desire. Example: tea and coffee
  • Complements: goods that are typically consumed or used together because they enhance each other’s value. Example: tennis rackets and tennis balls
28
Q

What are uses of XED?

A
  • Marketing strategies like selling complements together / in bundles
  • If a competitor changes its price, firms can work out the effect on their demand

A-Levels (94 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions