Micro: Price Determination In a Competitive Market

Question 1

What 2 axis are on a demand curve?

Answer 1

Price and quantity

Question 2

What is Demand?

Answer 2

The quantity that a consumer is willing and able to buy at a given price

Question 3

Factors that affect demand:

1. Consumer …………..and ……………
2. Income

3 …………….. Rates

4. Population

5 ……………… goods

6. ………………. goods

Answer 3

1. Taste and preferences
2. Interest
3. Substitute
4. Complimentary

Question 4

How do you work out Price elasticity in demand?

Answer 4

% Change in the quantity demanded/ % change in price

Question 5

Elastic demand is where the PED ?
Inelastic demand is where the PED ?
Unitary elasticity is where the PED ?

Answer 5

> 1
<1
=1

Question 6

What is the equation for income elasticity of demand?

Answer 6

% Change in quantity demanded/ % Change in income

Question 7

Cross-price elasticity of demand = % change in quantity demanded of …………… ÷ % change in the ………. of ……………….

Answer 7

Good A
Price
Good B

Question 8

For cross-price elasticity of demand (XED), for a complementary good, what happens when there is a fall in price?

Answer 8

The quantity demanded increases. The relationship is negative.

Question 9

For cross-price elasticity of demand (XED), for a substitute good, what happens when there is a fall in price?

Answer 9

For, substitutes, a fall in the price of one will lead to a fall in the quantity demanded of the other. Substitutes have positive cross elasticities of demand.

Question 10

Perfectly elastic demand - PED =?

Answer 10

+/- Infinity

Any price increase will cause demand to drop to zero

Question 11

Perfectly inelastic demand - PED =

Answer 11

0

Any price change won’t affect demand.

Question 12

What is market equilibrium?

Answer 12

The equilibrium is the point where the demand curve meets the supply curve.

Question 13

When there is excess supply in the market, what happens?

Answer 13

Producers cut the price as there is excess amount of resources.

Question 14

When there is excess demand in the market, what happens?

Answer 14

They raise the price as the resources are scarce

Question 15

A shift in the demand curve (but not in the supply curve) will have the following effects (Market Equilibrium):

An increase in demand (Outwards Shift) will cause …………….. in price. Supply will extend and form a new equilibrium (Q1,P1).

A decrease in demand (Inwards Shift)will cause the price ………… Supply will contract and form a new equilibrium (Q2, P2).

Answer 15

An Increase

To Fall

Question 16

A shift in the supply curve (but not in the demand curve) will have the following effects:

An increase in supply (Outwards Shift) will cause………………. in price. Demand will extend and form a new equilibrium (Q1,P1).

A decrease in supply (Inward Shift) will cause ………………….. in price. Demand will contract and form a new equilibrium (Q2,P2).

Answer 16

A decrease

An Increase

Question 17

If demand for a product is inelastic, a producer can increase ………….without the ……………sold falling very much.

Answer 17

Price

Quantity

Question 18

If the good is elastic, you must …………… the price to increase quantity sold

Answer 18

Decrease

By doing this, you increase total revenue

Question 19

What 3 factors affect elasticity?

Answer 19

1. Percentage of income and time
2. Availability of substitute of good/service
3. Type of good

Question 20

Are habitual/addictive goods elastic or inelastic?

Answer 20

Addictive goods tend to be more price inelastic because a change in price is unlikely to affect quantity significantly (if users feel they have a need for the product).

E.g. cigarettes

Question 21

What is the equation for total revenue?

Answer 21

Price per unit × Quantity sold

Question 22

What is the equation of price elasticity of supply?

Answer 22

% Change in quantity supplied ÷ % Change in price