Micreoeconomics, Part 2- Price Determination in a Competitive Market Flashcards
Demand definition:
The amount that consumers are willing and able to buy at each given price.
What does the demand curve look like?
- y axis = P
- x axis = Q
- Straight line between the ends of the axes, negative correlation. Line labelled D
- Origin = O
Law of diminishing marginal return / utility definition:
As we buy more of one item, the benefit we receive falls, therefore we will only buy more when the price falls.
Extension in demand definition:
Increases in quantity demanded caused by falls in price.
What does an extension in demand look like on the demand curve?
P
P1
Q Q1
Contraction in demand definition:
Decrease in quantity demanded caused by rising prices.
What does a contraction in demand look like on the demand curve?
P1
P
Q1 Q
What does an increase in demand look like on the demand curve?
P
P
Q Q1
-A line where lower P and Q meet
-A line where higher P and Q1 meet.Why does an increase in demand look the way it does on the demand curve?
Because at the same price, the demand has increased from Q to Q1.
What are the reasons that demand increases?
- Fashion
- Price of substitutes
- Increase in population
- Changes in income
- Advertising and publicity
- Prices of complementary products
- Consumer confidence
- Changes in quality
- Weather conditions
- The law
- Uncertainty over future prices
- Interest rates
- Consumer tastes and preferences
Inferior good definition:
Goods or services that will see demand fall when income rises.
Normal good definition:
Goods or services that will see an increase in demand when income rises.
Substitute definition:
Replacement for another product.
Composite demand definition:
A good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the supply for the other. e.g. milk and butter- Farmer Stone
Derived demand definition:
When the demand for one good or service comes from the demand for another good or service. One has to be a component of the other e.g. an increase in the demand for phones increases the demand for precious metals.
Complementary good definition:
Goods that are consumed together.
Price elasticity of demand definition:
Measures the responsiveness of the quantity demanded to a change in the price of the good.
Formula for PeD:
% change in quantity demanded / % change in price
If the PeD is above 1, what type of elastic demand does the good have?
Price elastic.
If the PeD is between 0 and 1, what type of elastic demand does the good have?
Price inelastic.
In an elastically demanded good, how does quantity demanded compare with the price cut?
The quantity demanded rises by proportionately more than the price cut.
In an inelastically demanded good, how does quantity demanded compare with the price cut?
The quantity demanded rises by proportionately less than the price cut.
In an elastically demanded good, what happens to revenue when price falls?
It increases.
In an elastically demanded good, what happens to revenue when price rises?
It decreases
What does the diagram of a perfectly elastic good look like?
The demand curve is horizontal.
What does the diagram of a perfectly inelastic good look like?
The demand curve is vertical.
What is the PeD of a perfectly elastic good?
Infinite
What is the PeD of a perfectly inelastic good?
0
What does the demand curve of a good with a PeD of 1 look like?
A curve that never touches either axes
What are the factors that affect PeD?
- Availability of substitutes
- Time
- Whether the good is a luxury or necessity
- Proportion of income spent on good
If the proportion of income spent on a good is low, is it price elastic or inelastic?
Price inelastic
What is the formula for total revenue?
Price x quantity
YeD definition:
The responsiveness of quantity demanded to a change in income.
YeD formula:
% change in quantity demanded / % change in income
What is the type of good if YeD is negative?
Inferior good
What is the type of good if YeD is possitive?
Normal good
What is the type of good if YeD is between 0 and 1?
Income inelastic
What is the type of good if YeD is greater than 1?
Income elastic
The higher the YeD, the more ____ the good
Luxurious
The closer YeD is to 1, the more it is a _____
Normal necessity
The more negative the YeD the more _____ the good is
Crappy
Supply definition:
The amount offered for sale by produces at each given price level.
What are the determinants of supply?
- Prices of raw materials
- Technological improvements
- Changes in labour productivity
- Regulation and bureaucracy
- Wage rates
- Subsidies
- Indirect taxes
- Expectations about future prices
- Objective of firms
- Number of sellers in the market
- Joint supply
Price elasticity of supply definition:
Measures the responsiveness of quantity supplied to changes in price.
Formula for PeS:
% change in quantity supplied / % change in price
What kind of good is it if PeS>1?
Price elastic
What kind of good is it if PeS<1?
Price inelastic
What kind of good is it if PeS=0?
Perfectly inelastic
What kind of good is it if PeS=infinity?
Perfectly elastic
What kind of good is it if PeS=1?
Unitary
Will the number for PeS be positive, negative or either?
Possitive
What are the factors that affect PeS?
- Time (short run/ long run)
- Raw materials need to be found, extracted, processed
- Availability of stocks or stock-piling (storing)
- The ease of switching between alternative production
- Availability of spare capacity
- Number of firms in the market and ease with which firms can enter a market
Equilibrium definition:
The price at which demand is equal to supply and there is no tendency for change
Disequilibrium definition:
The price at which the market supply does not equal demand. There is likely to be a further change or reaction by buyers or sellers
What does the speed at which a new equilibrium is formed after a change in demand or supply depend on?
PeD and PeS
Commodity definition:
A good that is traded, but usually refers to raw materials or semi-manufactured goods that are traded in bulk. Often they are unbranded goods (homogeneous) where all firms’ products are indistinguishable from each other.
What are some examples of commodities?
- Crude oil
- Corn
- Rape seed oil
- Gold
- Palm oil
- Cows
- Agricultural goods
Price floor definition:
Minimum price. Price below which the price of a good or service is not allowed to decrease
Consumer surplus definition:
The difference between the amount consumers are willing to pay and the amount they actually pay. It is a measure of consumer welfare. If the price of the good rises, welfare falls.
Producer surplus definition:
The difference between how much producers sell their goods for and how much they would be willing to accept. The higher the price of the good, the greater the producer welfare.
