Key Info for Chapter 2 - Price determination in a competitive market Flashcards
Define market
A market is a set of arrangement which brings buyers and sellers into contact to trade or exchange products or services
define the market price
also known as the equilibrium price - is set by supply and demand
Define competitive market
a market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market
Define supply
the quantity of a good or service that firms are willing and able to sell at a given price in a given period of time
Define demand
The quantity of a product that consumers are able and willing to purchase at various prices over a period of time
Define effective demand
the willingness and ability to buy a product
define market demand
the quantity of goods in a market that consumers are willing and able to buy
What is the law of demand
Presuming other factors remain constant, there is an inverse relationship between the price of a good and the demand
What happens to the demand as the price rises
contracts
What happens to the demand as the price falls
extends
What makes a market competitive?
When there are large numbers of buyers and sellers all passively accepting the ruling market price set by all those in the market
what type of markets lack entry and exit barriers
competitive
Define conduction of demand
a determinant of demand other than the goods own price that fixes the position of the demand curve
What happens to the demand curve when the demand increases
moves right
what causes the demand curve to move left
decrease in demand
If any of the conditions change what happens to the demand curve
it moves right or left
define the income effect
when the price of a good falls because the consumer can maintain current consumption for less expenditure, providing that the good is normal, some of the resulting increase in real income is used buy consumer to buy more of this product
define the substitution effect
when the price of a good falls because the product is now relatively cheaper than an alternative item and so some consumers switch their spending from the good in competitive demand to their product
true or false - a change in price never affects quantity demanded
FALSE - it ALWAYS affects quantity demand
What are the 5 conditions of demand
- Price of substitute goods or goods in competing demand
- The price of goods in joint demand (complements)
- Personal income - real disposable income
- Tastes and preferences
- Population size
What are substitutes
bought in place of each other
give an example of substitutes
tea and coffee, grapes and strawberries, playstation and Xbox
what are complements
goods bought together
give an example of complements
cups and saucers, knives and forks, cars and petrol
Define normal goods
one for which the quantity demanded increases in response to an increase in consumer income
Define inferior goods
one for which the quantity demanded deceases in a response to an increase in consumer income
In terms of substitute and complementary goods, what causes the demand curve to move right for increasing demand
rise in price of substitute good
fall in price of complementary good
In terms of substitute and complementary goods, what causes the demand curve to move left for decreasing demand
fall in price of substitute good
rise in price of complementary goods
define extension in terms of change in quantity demanded caused by price
Fall in price, moving down the demand curve
Define contraction in terms of change in quantity demanded caused by price
rise in price, moving up the demand curve
What happens to the demand when the demand curve moves right
increased demand
What happens to the demand when the demand curve moves left
decreased demand
what does elasticity mean
when a change in one variable (such as price) causes a change in a second variable (such as quantity demanded) then the elasticity can be calculated
what is the formula for elasticity
(percentage change in quantity demanded) / (percentage change in price)
True or false - price elasticity of demand is always negative
TRUE
factors affecting PED
- sustainability
- Percentage if income
- Necessities or luxuries
- the width of the market definition
- time
What is the only case to refer to extension and contraction?
change in price
True or false - The result of PED is a percentage rather than a coefficient
FALSE - it is a coefficient, NOT a percentage, a % will get you no marks
What makes the PED elastic
total consumer expenditure increases in response to price fall
What makes PED inelastic
total expenditure decreases in a response to price fall
Define market supply
the quantity of a good or service that all firms plan to sell at given prices in a given period of time
Define profit
the difference between total sales revenue and total cost of production
Define total revenue
the money a firm receives from selling its outputs, calculated by multiplying the quantity sold by the price
What are the 4 costs of production that determine supply?
- Wage costs
- cost of raw materials
- energy costs
- costs of borrowing
What determines the PED
- Price and availability of substitutes
- width of market definition
- relative expense of an item with respect to income
- necessitates or luxuries
- time
- Peak times
True or False - branding disables companies from raising their prices to make their demand curves inelastic
FALSE - it enables it
Define income elasticity of demand
measures the relationship between a change in quantity demanded for a good and a change in real income
What is the formula for income elasticity of demand
(% change in quantity demanded) / (% change in income)
Define cross elasticity of demand
measures the change in demand for one goods change in response to the price of another
what is the formula for XED (cross elasticity of demand)
(% change of quantity of ‘A’ demanded) / (% change in price of ‘B’)
Is the XED of complements positive or negative
ALWAYS NEGATIVE
IS the XED of substitutes positive or negative
ALWAYS POSITIVE
what type of good is a positive YED
normal good
what type of good is a negative YED
inferior good
What does a positive XED of >1 mean
a strong substitute and means there’s a larger rise in demand for substitute product
What does a positive XED of <1 mean
a weak substitute and means theres a smaller rise in demand for substitute product
what does Zero XED mean
an independent good with no change in demand for the other item
what does a negative XED <1 mean
weak complement with a small rise in demand for complement products
What does a negative XED >1 mean
strong complements with large rise for a complement product
what is the difference in ‘change in quantity demanded’ and ‘change in demand’
change in quantity demanded is caused by a change in price that causes a movement along the demand curve
change in demand is affected by conditions of demand which causes the demand curve to move
what is the law of supply
as the price of a commodity rises, producers expand their supply onto the market.
if firms want to make a profit, it is logical that if the price of a good or service increases, that they will be prepared to supply more.
Supply can be increased by producing more or by releasing goods stored in a warehouse.
What does a supply curve look like
upward sloping
What is the way to help remember the relationship between substitutes, compliments, and their numerical value?
Party Season Nearly Christmas
P- Positive
S - Substitute
N - Negative
C - Complements
What are the factors that influence supply?
Changes in cost of production Fall in exchange rate Changes in technology Price of substitutes in production Tax and subsidies Tastes and preferences
What causes a movement along the supply curve? (extension and contraction)
Change in market price
What causes the supply curve to move?
Change in any of the influences of supply
Factors affecting Price Elasticity of Supply
Availability of other factors of production
Stocks
Time
Define Price Elasticity Of Supply
Measures the extent to which the supply of a good changes in response to a change in the price of that good
True or False - PES is always negative
FALSE - PES IS ALWAYS POSITIVE
What is the formula for PES?
% Change in quantity supplied / % change in price
True or false - When supply is inelastic, its hard to supply more when the price goes up
TRUE
What point in the graph is the market clearing price/equilibrium price
The point at which the supply and demand curves cross
What is the market clearing price?
where supply and demand are equal. It helps determine the correct price for a good or service. The market is in an equilibrium when the planned demand=planned supply
Why does disequilibrium occur?
When the planned demandplanned demand (price will rise)
What is excess demand
The price is below the equilibrium price
What will happen to price when demand is greater than supply
The price will rise
What affect does moving the curves have?
WHEN BOTH CURVES MOVE, THE EFFECT DEPENDS ON THE RELATIVE SIZE OF THE MOVES
What happens to demand when both equilibrium price and equilibrium quantity increase?
Increases
What happens to demand when equilibrium price and equilibrium quantity decreases
Decreases
What happens to supply when equilibrium price decreases and equilibrium quantity increases
Increases
What happens to supply when equilibrium price increases and equilibrium quantity decreases
decreases
What affects the movement on the Demand Curve
- how much D moves by
- depends on Price Elasticity of Supply
- assumes the supply curve doesn’t move
What affects the movement of the Supply Curve
- how much S moves by
- Depends on Price Elasticity of Demand
- assumes the demand curve doesn’t move
what affects the movement of both the supply and demand curves when they both move at the same time
- the relative size of the moves
2. depends on both PES and PED
Define joint supply
when production of one good leads to the supply of another good
Define competing supply
when raw materials are used to produce one good, they can not be used to produce another good
Define derived demand
demand for a good which is an input into the production of another good
Define composite demand
demand for a good which has more than one use
name an example of derived demand
increased demand in cars leads to an increase demand of engines
name an example of composite demand
demand for wheat for bread, biofuel and feeding livestock
What is the main role of speculative demand
they drive commodity prices up or down. When the speculators think a commodity is going to rise, they buy the product, hoping to sell it later on at a profit.
What does buying bulk commodities do to the price
forces it up
List factors that contribute to an increase in house prices across the UK relating to demand
Houses are gaining value due to dropped mortgages due to lower interest rates.
Location - good schools increase demand.
Increase in real disposable income.
Increase in population - ageing population
People marrying later.
More divorces
List factors that contribute to an increase in house prices across the UK relating to supply
Planning permission. Land shortages. Labour shortages. Time. Competing supply.
Define merit goods
a good which when consumed leads to greater benefits being enjoyed by the person consuming the good than they realise.
Name an example of a merit good
healthcare such as injections
Define allocative efficiency
occurs when the available economic resources are used to produce the combination of goods and services that best matches people’s tastes and preferences
Define productive efficiency
for the economy as a whole occurs when it is impossible to produce more of one good without producing less of another . For a firm it occurs when the average total cost of production is minimised.
