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Economics > Key Info for Chapter 2 - Price determination in a competitive market > Flashcards

Key Info for Chapter 2 - Price determination in a competitive market Flashcards

1
Q

Define market

A

A market is a set of arrangement which brings buyers and sellers into contact to trade or exchange products or services

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2
Q

define the market price

A

also known as the equilibrium price - is set by supply and demand

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3
Q

Define competitive market

A

a market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market

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4
Q

Define supply

A

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

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5
Q

Define demand

A

The quantity of a product that consumers are able and willing to purchase at various prices over a period of time

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6
Q

Define effective demand

A

the willingness and ability to buy a product

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7
Q

define market demand

A

the quantity of goods in a market that consumers are willing and able to buy

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8
Q

What is the law of demand

A

Presuming other factors remain constant, there is an inverse relationship between the price of a good and the demand

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9
Q

What happens to the demand as the price rises

A

contracts

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10
Q

What happens to the demand as the price falls

A

extends

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11
Q

What makes a market competitive?

A

When there are large numbers of buyers and sellers all passively accepting the ruling market price set by all those in the market

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12
Q

what type of markets lack entry and exit barriers

A

competitive

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13
Q

Define conduction of demand

A

a determinant of demand other than the goods own price that fixes the position of the demand curve

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14
Q

What happens to the demand curve when the demand increases

A

moves right

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15
Q

what causes the demand curve to move left

A

decrease in demand

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16
Q

If any of the conditions change what happens to the demand curve

A

it moves right or left

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17
Q

define the income effect

A

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

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18
Q

define the substitution effect

A

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

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19
Q

true or false - a change in price never affects quantity demanded

A

FALSE - it ALWAYS affects quantity demand

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20
Q

What are the 5 conditions of demand

A
  1. Price of substitute goods or goods in competing demand
  2. The price of goods in joint demand (complements)
  3. Personal income - real disposable income
  4. Tastes and preferences
  5. Population size
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21
Q

What are substitutes

A

bought in place of each other

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22
Q

give an example of substitutes

A

tea and coffee, grapes and strawberries, playstation and Xbox

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23
Q

what are complements

A

goods bought together

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24
Q

give an example of complements

A

cups and saucers, knives and forks, cars and petrol

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25
Q

Define normal goods

A

one for which the quantity demanded increases in response to an increase in consumer income

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26
Q

Define inferior goods

A

one for which the quantity demanded deceases in a response to an increase in consumer income

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27
Q

In terms of substitute and complementary goods, what causes the demand curve to move right for increasing demand

A

rise in price of substitute good

fall in price of complementary good

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28
Q

In terms of substitute and complementary goods, what causes the demand curve to move left for decreasing demand

A

fall in price of substitute good

rise in price of complementary goods

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29
Q

define extension in terms of change in quantity demanded caused by price

A

Fall in price, moving down the demand curve

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30
Q

Define contraction in terms of change in quantity demanded caused by price

A

rise in price, moving up the demand curve

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31
Q

What happens to the demand when the demand curve moves right

A

increased demand

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32
Q

What happens to the demand when the demand curve moves left

A

decreased demand

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33
Q

what does elasticity mean

A

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

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34
Q

what is the formula for elasticity

A

(percentage change in quantity demanded) / (percentage change in price)

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35
Q

True or false - price elasticity of demand is always negative

A

TRUE

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36
Q

factors affecting PED

A
  1. sustainability
  2. Percentage if income
  3. Necessities or luxuries
  4. the width of the market definition
  5. time
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37
Q

What is the only case to refer to extension and contraction?

A

change in price

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38
Q

True or false - The result of PED is a percentage rather than a coefficient

A

FALSE - it is a coefficient, NOT a percentage, a % will get you no marks

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39
Q

What makes the PED elastic

A

total consumer expenditure increases in response to price fall

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40
Q

What makes PED inelastic

A

total expenditure decreases in a response to price fall

41
Q

Define market supply

A

the quantity of a good or service that all firms plan to sell at given prices in a given period of time

42
Q

Define profit

A

the difference between total sales revenue and total cost of production

43
Q

Define total revenue

A

the money a firm receives from selling its outputs, calculated by multiplying the quantity sold by the price

44
Q

What are the 4 costs of production that determine supply?

A
  1. Wage costs
  2. cost of raw materials
  3. energy costs
  4. costs of borrowing
45
Q

What determines the PED

A
  1. Price and availability of substitutes
  2. width of market definition
  3. relative expense of an item with respect to income
  4. necessitates or luxuries
  5. time
  6. Peak times
46
Q

True or False - branding disables companies from raising their prices to make their demand curves inelastic

A

FALSE - it enables it

47
Q

Define income elasticity of demand

A

measures the relationship between a change in quantity demanded for a good and a change in real income

48
Q

What is the formula for income elasticity of demand

A

(% change in quantity demanded) / (% change in income)

49
Q

Define cross elasticity of demand

A

measures the change in demand for one goods change in response to the price of another

50
Q

what is the formula for XED (cross elasticity of demand)

A

(% change of quantity of ‘A’ demanded) / (% change in price of ‘B’)

51
Q

Is the XED of complements positive or negative

A

ALWAYS NEGATIVE

52
Q

IS the XED of substitutes positive or negative

A

ALWAYS POSITIVE

53
Q

what type of good is a positive YED

A

normal good

54
Q

what type of good is a negative YED

A

inferior good

55
Q

What does a positive XED of >1 mean

A

a strong substitute and means there’s a larger rise in demand for substitute product

56
Q

What does a positive XED of <1 mean

A

a weak substitute and means theres a smaller rise in demand for substitute product

57
Q

what does Zero XED mean

A

an independent good with no change in demand for the other item

58
Q

what does a negative XED <1 mean

A

weak complement with a small rise in demand for complement products

59
Q

What does a negative XED >1 mean

A

strong complements with large rise for a complement product

60
Q

what is the difference in ‘change in quantity demanded’ and ‘change in demand’

A

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

61
Q

what is the law of supply

A

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.

62
Q

What does a supply curve look like

A

upward sloping

63
Q

What is the way to help remember the relationship between substitutes, compliments, and their numerical value?

A

Party Season Nearly Christmas

P- Positive
S - Substitute
N - Negative
C - Complements

64
Q

What are the factors that influence supply?

A 
Changes in cost of production
Fall in exchange rate
Changes in technology
Price of substitutes in production 
Tax and subsidies
Tastes and preferences
65
Q

What causes a movement along the supply curve? (extension and contraction)

A

Change in market price

66
Q

What causes the supply curve to move?

A

Change in any of the influences of supply

67
Q

Factors affecting Price Elasticity of Supply

A

Availability of other factors of production
Stocks
Time

68
Q

Define Price Elasticity Of Supply

A

Measures the extent to which the supply of a good changes in response to a change in the price of that good

69
Q

True or False - PES is always negative

A

FALSE - PES IS ALWAYS POSITIVE

70
Q

What is the formula for PES?

A

% Change in quantity supplied / % change in price

71
Q

True or false - When supply is inelastic, its hard to supply more when the price goes up

A

TRUE

72
Q

What point in the graph is the market clearing price/equilibrium price

A

The point at which the supply and demand curves cross

73
Q

What is the market clearing price?

A

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

74
Q

Why does disequilibrium occur?

A

When the planned demandplanned demand (price will rise)

75
Q

What is excess demand

A

The price is below the equilibrium price

76
Q

What will happen to price when demand is greater than supply

A

The price will rise

77
Q

What affect does moving the curves have?

A

WHEN BOTH CURVES MOVE, THE EFFECT DEPENDS ON THE RELATIVE SIZE OF THE MOVES

78
Q

What happens to demand when both equilibrium price and equilibrium quantity increase?

A

Increases

79
Q

What happens to demand when equilibrium price and equilibrium quantity decreases

A

Decreases

80
Q

What happens to supply when equilibrium price decreases and equilibrium quantity increases

A

Increases

81
Q

What happens to supply when equilibrium price increases and equilibrium quantity decreases

A

decreases

82
Q

What affects the movement on the Demand Curve

A
  1. how much D moves by
  2. depends on Price Elasticity of Supply
  3. assumes the supply curve doesn’t move
83
Q

What affects the movement of the Supply Curve

A
  1. how much S moves by
  2. Depends on Price Elasticity of Demand
  3. assumes the demand curve doesn’t move
84
Q

what affects the movement of both the supply and demand curves when they both move at the same time

A
  1. the relative size of the moves

2. depends on both PES and PED

85
Q

Define joint supply

A

when production of one good leads to the supply of another good

86
Q

Define competing supply

A

when raw materials are used to produce one good, they can not be used to produce another good

87
Q

Define derived demand

A

demand for a good which is an input into the production of another good

88
Q

Define composite demand

A

demand for a good which has more than one use

89
Q

name an example of derived demand

A

increased demand in cars leads to an increase demand of engines

90
Q

name an example of composite demand

A

demand for wheat for bread, biofuel and feeding livestock

91
Q

What is the main role of speculative demand

A

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.

92
Q

What does buying bulk commodities do to the price

A

forces it up

93
Q

List factors that contribute to an increase in house prices across the UK relating to demand

A

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

94
Q

List factors that contribute to an increase in house prices across the UK relating to supply

A 
Planning permission.
Land shortages.
Labour shortages. 
Time.
Competing supply.
95
Q

Define merit goods

A

a good which when consumed leads to greater benefits being enjoyed by the person consuming the good than they realise.

96
Q

Name an example of a merit good

A

healthcare such as injections

97
Q

Define allocative efficiency

A

occurs when the available economic resources are used to produce the combination of goods and services that best matches people’s tastes and preferences

98
Q

Define productive efficiency

A

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.

Economics (9 decks)

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