External Environment

Question 1

Market mechanism

Answer 1

interaction of supply and demand for a particular item

Question 2

Factors that influence supply

Answer 2

~ price
~ price of other goods
~ price of related goods
~ cost to make
~ changes in technology

Question 3

Equilibrium price

Answer 3

price where the volume demanded and volume businesses willing to supply are the same

Question 4

Increase in consumer income leads to…

Answer 4

~ rise in market price

~ rise in quantity supplied

Question 5

Product becomes unfashionable leads to…

Answer 5

~ fall in market price

~ fall in quantity supplied

Question 6

Improvement in production technology leads to…

Answer 6

~ fall in market price

~ rise in quantity supplied

Question 7

Rise in factor costs leads to…

Answer 7

~ rise in market price

~ fall in quantity supplied

Question 8

Elasticity

Answer 8

extent of a change in demand and/or supply given a change in price

Question 9

Price elasticity of demand (PED)

Answer 9

= (change in quantity demanded as % of original demand) / (change in price as % of original price)

Question 10

PED results

Answer 10

<1 = inelastic demand
0 = perfectly inelastic, vertical straight line
1 = unit elasticity, proportional change
>1 = elastic demand
Infinity = perfectly elastic, horizontal straight line

Question 11

Factors influencing PED

Answer 11

~ substitutions
~ time horizon
~ competitors' pricing
~ luxuries and necessities
~ % income spent
~ habit-forming goods

Question 12

Giffen goods

Answer 12

basic good, increase in demand as price increases

Question 13

Veblen goods

Answer 13

more attractive the higher the price

Question 14

Income elasticity of demand

Answer 14

responsiveness of demand to changes in household income

= % change demand / % change income

Question 15

Cross elasticity of demand

Answer 15

responsiveness of demand for one good to changes in price of another good
= % change of quantity of A / % change in price of B
+ve = substitutes
-ve = complements
0 = unrelated

Question 16

Price elasticity of supply (PES)

Answer 16

responsiveness of supply to a change in price

= % change quantity supplied / % price change

Question 17

Perfect competition

Answer 17

~ many buyers and sellers
~ no barriers or collusion
~ homogeneous products
~ single selling price

Question 18

Monopoly

Answer 18

~ one supplier and many buyers
~ many barriers to enter industry
~ 1 biz can set selling price or quantity supplied
~ supernormal profits

Question 19

Monopolistc competition

Answer 19

~ many buyers and sellers
~ some differentiation betwn products (branding)
~ some customer loyalty
~ few barriers to entry

Question 20

Oligopoly

Answer 20

~ few large sellers and many buyers
~ product differentiation
~ mutual interdependency
~ non-price competition

Question 21

Duopoly

Answer 21

~ two dominant suppliers who control prices
~ temptation to collude
~ higher prices as competition limited