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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

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2
Q

What is latent demand?

A

Willingness to buy, but not yet ability to buy

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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

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4
Q

What is derived demand?

A

When demand for one product drives the demand for another

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5
Q

What is composite demand?

A

Good is demanded for more than one use

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6
Q

What is individual demand?

A

A consumer’s demand for a good or service

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7
Q

What is market demand?

A

All consumers’ demands in the market summed together

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8
Q

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

A
  • Extension: movement to the right - quantity demanded increases due to a fall in price
  • Contraction: movement to the left - quantity demanded decreases due to a rise in price
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9
Q

What is ceteris paribus?

A
  • All other influencing factors are held constant
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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
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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
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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
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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 = %∆ quantity demanded ÷ %∆ price
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14
Q

Why is PED negative?

A

Because the quantity demanded is inversely related to the price

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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
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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
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17
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
18
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
19
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 = %∆ demand ÷ %∆ income
20
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
21
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 <—> ∞
22
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
23
Q

What are uses of YED?

A
  • Visualising effect of recession / growth on demand
  • Business planning for product range
  • Helps firms anticipate future demand
24
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 = %∆ demand for good A ÷ %∆ price of good B
25
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)
26
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
27
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
28
Q

What is joint supply?

A

Two or more goods that derive from a single production process - a change in the supply of one good leads to a change in the supply of a by-product

29
Q

What is individual supply and market supply?

A

Individual: a singular producer’s supply of a good/service
Market: all producers’ supplies to the market summed together

30
Q

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

A
  • Extension: movement to the right - quantity supplied increases due to a rise in price
  • Contraction: movement to the left - quantity supplied decreases due to a fall in price
31
Q

Why does the supply curve slope upwards?

A
  • Higher market prices motivate firms to supply more as they expect more profit.
  • Producing more increases the marginal cost of production so firms need higher prices to cover these costs (Law of Diminishing Returns)
32
Q

What factors cause shifts in supply?

A

Changes in:

  • Costs of production
  • Production technology
  • Weather/climate
  • Events (e.g. strikes, pandemics)
  • Indirect taxes
  • Producer subsidies
  • Price of substitutes in production
  • Number of firms supplying to the market
33
Q

What is the market?

A

Created by the interaction of buyers (demand) and sellers (suplly)

34
Q

What is price elasticity of supply (PES) and its formula?

A
  • The responsiveness of quantity supplied of a good, to a change in its price
  • PES = %∆ quantity supplied ÷ %∆ price
35
Q

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

A
  • Perfectly inelastic: PES = 0 | Gradient = vertical
  • Inelastic: PES = 0 <—> 1 | Gradient = steep
  • Unitary: PES = 1 | Gradient = diagonal
  • Elastic: PES = 1 <—> ∞ | Gradient = shallow
  • Perfectly elastic: PES = ∞ | Gradient = horizontal
36
Q

What factors affect PES?

A
  • Time period
  • Bottlenecks in supply
  • Breakdowns in supply chains
  • Spare capacity
  • Stock levels
  • Availability of producer substitutes
  • Ease of entry into the market
37
Q

How do substitutes work in interrelated markets?

A

If supply of a good shifts left, this increases the market price, so the demand for a substitute will shift to the right (and vice versa)

38
Q

How do complements and joint deamand work in interrelated markets?

A

If the supply of a good shifts right, this decreases its market price, which will cause demand for the complement to shift right (and vice versa)

39
Q

How does composite deamand work in interrelated markets?

A

If the demand for a good increases, the quantity increases, this causes supply to shift left in the market for the good that is in composite demand (and vice versa)

40
Q

How does joint supply work in interrelated markets?

A

If the demand for a good decreases (left shift), then the market equilibrium quantity falls, so the supply of a good in joint supply will decrease (shift left) (and vice versa)

41
Q

How does derived demand work in interrelated markets?

A

If the demand for a final good increases, then the demand for the factors of production used to produce it will also increase (and vice versa)

A-Levels (103 decks)

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