Price Determination

Question 1

What is a market?

Answer 1

Any place that brings together buyers and sellers with a view to agreeing a price.

Question 2

New markets always have to be physical places?

Answer 2

No, because new technology is allowing the formation of virtual markets and spreading markets globally.

Question 3

What is a commodity market?

Answer 3

A worldwide market which trades in commodities.

Question 4

What is a financial market?

Answer 4

A market of stocks shares currencies and financial instruments.

Question 5

What is a good market?

Answer 5

A good market is the supply and demand of goods and services in general.

Question 6

What is a factors market?

Answer 6

He factors market is the supply and demand of the factors of production.

Question 7

What are the market forces and what did they do?

Answer 7

Supply and demand. They drive markets.

Question 8

What is affective demand?

Answer 8

The amount that buyers are willing and able to purchase at a given price.

Question 9

What is the law of demand?

Answer 9

As prices fall more will be demanded because people can afford more and goods may become cheaper than substitutes.

Question 10

What is supply?

Answer 10

Supply is the quantity offered for sale at a given price.

Question 11

How is price determined?

Answer 11

Through the market forces of demand and supply.

Question 12

What happens when demand is equal to supply?

Answer 12

The equilibrium point has been reached, this point is the market price.

Question 13

What changes to market conditions shift the demand and supply curves?

Answer 13

Constantly fluctuating prices of commodities. Changes to demand and supply factors that shift to the car. Changes to market conditions determine the position of demand and supply curves.

Question 14

What are the factors of demand?

Answer 14

PASIFIC Population - more people - more demand Advertising - good advertising - more desirable - more demand Substitutes - increased price of substitute - increased demand for other goods Income - increased income - people have more money - people can demand more Fashion - increased version - more popular - more demanded Interest rates - cost of borrowing - if lower ppl borrow more - more disposable income - more demandComplements - complementary goods - if one price falls the overall total of both does so demand for both increases

Question 15

What are the factors of supply?

Answer 15

PINTS WC Productivity - output/worker - if higher more supplied Indirect tax - tax on the goods or spending increased tax less appealing to the consumer so less suppliedNumber of firms - more firms producing - more supplied Technology - better technology - more productive - more suppliedSubsidies - subsidised goods are more appealing to the producer so more are suppliedWeather - if weather suits a product more of that product will be produced (hot weather - Ice cream)Cost of production - decreased cost of production - profit margins rise - more supplied

Question 16

What is price elasticity of demand?

Answer 16

PED is a way of measuring the proportional responsiveness of demand to a change in price of a good.

Question 17

What is the formula for PED?

Answer 17

PED equals the percentage change in quantity demanded divided by percentage change in price.%change in QD/%change in P

Question 18

What is the relationship between price and quantity demanded, and what does this mean?

Answer 18

The relationship between price and quantity demanded is inverse this means PED is always negative. We do know the positive/negative and focus on the size of the number.

Question 19

What are the possible ranges of PED and what do they mean?

Answer 19

0, Perfect Inelastic, Price change - no change in demand<1, inelastic unit, QD changes by less than price (%)1, elasticity, QD changes by the same as price (%)>1, elastic, QD changes by more than price (%)Perfect Elasticity, demand exists at one price only

Question 20

What factors affect PED?

Answer 20

Number and strength of substitutes - many strong subs. - inc. price and ppl will switch - demand dropsHabit forming/addictive - ppl that are addicted so are forced to meet price changes - no change in demandLuxury or Necessity - ppl stop buying luxury items if they become expensive - demand drops. But have to keep buying necessary items - demand stays the samePercentage of income spend on goods - for cheap products there can be a 100% inc. in price and ppl can still afford - demand stays the same. Not the case for expensive - demand dropsTime periods - time critical items - forced to buy even if expensive - demand stays the same. Not time critical - don’t have to buy - demand drops

Question 21

How can PED be used?

Answer 21

It is used by businesses to help them calculate the impact price changes will have on their sales and sales revenues.

Question 22

Why shouldn’t you lower the price of an inelastic good?

Answer 22

Because there will only be a slight increase in demand and extra money from more sales which would be exceeded by the loss of money per item due to the price decrease.

Question 23

Is PED always consistent along the curve and if not why not?

Answer 23

No because: the same attitude change in quantity demanded may be different % changes. Also the same actual change in price maybe a different percentage change in price. E.g. 18-20 = 11.11% inc. but 2-4 = 100% inc. And as the calculation is based on % changes different % changes effect the results - SEE GRAPH IN FOLDER IF UNSURE.

Question 24

What is taxation?

Answer 24

A compulsory payment to the government.

Question 25

What are the two main types of tax?

Answer 25

Direct tax on income and indirect tax on spending.

Question 26

Which items are VAT (and indirect tax) free and why?

Answer 26

Safety equipment and baby good are VAT free because they are essentials so everybody needs to be able to afford them.

Question 27

What is a specific tax?

Answer 27

A tax placed on a good or service which is a specific amount of money.

Question 28

What is an Ad Valorem tax?

Answer 28

A tax placed on the good or service which is a percentage of the total cost of the good/service before tax.

Question 29

How does the specific tax shift the supply curve?

Answer 29

It will shift the supply curve parallel to the original curve.

Question 30

What happens when you apply a tax to a fully working market?

Answer 30

You reduce the efficiency because you force up the price and reduce the amount consumers can afford to buy.

Question 31

What is a consumer surplus?

Answer 31

The difference between the price you’re willing to payed the consumer and the actual price you end up paying.

Question 32

What is a producer surplus?

Answer 32

The difference between what a supplier would be prepared to supply at and the actual price they supply at.

Question 33

What is dead weight loss?

Answer 33

The combined loss to the producer and consumer surpluses when a tax is introduced to a working market.

Question 34

What is a subsidy?

Answer 34

A payment made to the producer by the government to encourage or increase production this will move supply outwards.

Question 35

Why might the government grant a subsidy?

Answer 35

Lower prices and make things more affordable. To increase supply. To help firms become more competitive. To encourage your firm to move to an area of high unemployment. Encourage firms to do something e.g. becoming eco friendly

Question 36

What is price elasticity of supply?

Answer 36

PES is the proportional responsiveness of quantity supplied to a change of price.

Question 37

What are the factors of PES?

Answer 37

Length of prod. process - quicker process - more elasticAmount of spare capacity - easier to inc. supply if you’re not working at 100% cap. - not at full capacity - more elasticLvl of stocks - large stock piles - easier to inc. supply to the market - more elasticSubstitutability of FOP’s - how easy it is to sub. resources from prod. of one good to another- more substitutable - more elasticTime period - in long term you can hire more ppl to produce more - longer time period - more elasticArtificial barriers to entry - blocks entry into the market - less supplied - less elastic

Question 38

What does demand for substitutes mean regarding interrelationship between markets?

Answer 38

Demand for substitute means how demand into different substituted all markets is linked.

Question 39

What does joint demand mean - regarding interrelationship between markets?

Answer 39

Joint demand means how demand for complementary goods links between markets.

Question 40

What does composite demand mean regarding interrelationships between markets?

Answer 40

Composite demand means demand for a good that has multiple uses - this is the total demand for all its uses.

Question 41

When does joint supply typically occur?

Answer 41

When the production of one good also results in the production of another. E.g. Beef and Leather

Question 42

What is derived demand and what does it relate to?

Answer 42

Demand that stems from demand for goods and services made by the workforce. It relates to the factors of production. For example an increase demand for houses leads to increased demand for builders.

Question 43

What is crossed price elasticity of demand?

Answer 43

A measure of the responsiveness of demand for a good to a change in the price of another good.

Question 44

What does cross price elasticity of demand measure?

Answer 44

The strength of relationships between substitute goods/ services and complementary goods/services.

Question 45

What xed will you have for substitutes and complements?

Answer 45

XED for substitutes will always be positive, XED for complements will always be negative. Xed > +1 strong substitutes Xed < -1 strong complements

Question 46

What is the formula for XED?

Answer 46

XED equals the percentage change in quantity demanded of good A / percentage change in price of good B. %change in QD of good A/%change in P of good B

Question 47

What do we assume when using XED?

Answer 47

People act rationally and switch to the best value for money product. If people don’t have time they will not shop around and make irrational decisions as a result.

Question 48

What is income elasticity of demand?

Answer 48

The responsiveness of demand to a change in real incomes.

Question 49

What is a real income?

Answer 49

Real income is what you can buy with your income this depends on inflation and market prices.

Question 50

What is the formula for YED?

Answer 50

YED equals percentage change in quantity demanded/percentage change in income.%change in QD/%change in Y

Question 51

What are the three types of goods?

Answer 51

Luxury goods, normal goods and inferior goods.

Question 52

What happens to each of these goods were income percentage increases?

Answer 52

Percentage demand for normal goods increases by the same percentage as incomes. Percentage demand for luxury goods increases by more than the income percentage. Percentage demand for inferior goods decreases as a percentage.

Question 53

What must happen to a products demand in booms and recessions to make them cyclical or countercyclical?

Answer 53

In a boom the demand must increase and the demand must decrease in a recession to make a good cyclical. In a boom demand must decrease and the demand must increase in a recession to make a good countercyclical.

Question 54

What determines what is produced?

Answer 54

Consumer preference - there is consumer sovereignty (total control)

Question 55

What are the four types of efficiency and what did they do?

Answer 55

Allocative efficiency - allocates resources to produce the goods and services consumers need and want.Productively efficient - optimum combination of inputs to produce maximum output is for minimum costs.Dynamic efficiency - efficient allocation of resources over time (often through R&D)Static efficiency - occurs when resources are allocated efficiently at a specific point in time.