Price Determination Flashcards

1
Q

What is Effective demand?

A

Demand from consumers that is backed up with the ability to pay.

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2
Q

What is demand?

A

Demand for a product is the quantity that purchasers are willing and able to buy at a given price in a given time period.

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3
Q

What causes a shift in the demand curve?

A

Changing prices of substitutes in competitive demand
Changing price of complements in joint demand
Changes in real disposable income of consumers
Inequality
Interest rates
Seasonal factors

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4
Q

What is derived demand, give an example?

A

Derived demand occurs when there is a demand for a good e.g. Steel resulting from demand for an intermediate good or service e.g. new houses

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5
Q

What is joint demand?

A

Joint demand is when demand for one product is positively related to market demand for a realted good or service.

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6
Q

What is an example of joint demand?

A

Fish and chips.

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7
Q

What is the cross elasticity of demand for two complements that are in joint demand?

A

Negative

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8
Q

What is composite demand?

A

Composite demand is where goods have more than one use, an increase in the demand to one product leads to a fall in the supply of the other.

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9
Q

What is an example of composite demand?

A

Milk, which can be used for cheese, yoghurts, cream, butter and other products.

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10
Q

What is supply?

A

Supply is defined as the quantity of a good or service that producers are willing and able to supply at a given price level in a given time period.

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11
Q

What causes shifts in the supply curve?

A

Changes in the unit costs of production
A depreciation in the exchange rate (Imports more expensive)
Advances in technology
Entry of new producers
Favorable weather conditions
Taxes, subsidies and government regulations

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12
Q

What is joint supply?

A

Joint supply is where an increase in the supply of one good leads to increases in the supply of a by-product.

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13
Q

What is an example of joint supply?

A

An expansion in the beef production will lead to a rising market supply of beef hides.

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14
Q

What is Market equilibrium price?

A

The price at which demand is equal to demand, it is the clearing point of the market.

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15
Q

What does Equilibrium mean in a market?

A

Equilibrium is when there is no tendency for market price to change.

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16
Q

What is excess demand?

A

Excess demand is when quantity demanded exceeds available supply.

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17
Q

What could excess demand result in?

A

It may result in queuing and an upward pressure on price, higher prices then ration demand to those consumers with effective demand. These higher prices in theory could stimulate an expansion of supply as producers respond to the chance of higher profits.

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18
Q

How is excess demand represented on a Demand and Supply curve?

A

See internet image.

19
Q

What is excess supply?

A

Excess supply is a state of disequilibrium in a market, supply is greater than demand there are unsold goods in the market.

20
Q

How does excess supply effect the demand and supply curve?

A

Surpluses put downward pressure on the market price, as prices fall, there is an extension of demand which helps to lower the excess supply and take the market towards equilibrium.

21
Q

What is consumer surplus?

A

Consumer surplus is the difference between the price consumers are able to pay for a good or service and total amount they actually pay.

22
Q

What is producer surplus?

A

Producer surplus is the difference between the price producers are able to supply a product for and the price they actually supply..

23
Q

What does PED measure?

A

The responsiveness of demand to a change in a good’s price.

24
Q

What is the formula for PED?

A

QD/P

25
Q

What is the PED of a downward sloping demand curve of normal good?

A

Negative.

26
Q

What does a PED of 0 mean?

A

Demand is perfectly inelastic, demand does not change when the price change, the demand curve is vertical

27
Q

What does a PED OF 1 mean?

A

Demand is unitary elastic, this means the change in demand is equal to the change in price. Downward slope google.

28
Q

What are the factors affecting the PED?

A
Availability of substitutes
Cost of switching to a different product
Degree of necessity
Brand loyalty
Percentage of income spent
29
Q

What does a PED of infinity mean?

A

Demand is perfectly elastic, a change in supply will not lead to any change in equilibrium price, shown by a horizontal demand curve.

30
Q

What is price discrimination?

A

This is where the suppliers decides to charge different prices for the same product to different segments of the market.

31
Q

How can PED be used by a firm?

A

It can be used to see how a price change will affect total revenue of sellers.

32
Q

What is the income elasticity of normal goods?

A

Positive

33
Q

What is the income elasticity of Luxury goods?

A

Greater than 1

34
Q

What is income elasticity of necessities?

A

0-1

35
Q

What is the income elasticity of inferior goods?

A

Negative

36
Q

What are inferior goods?

A

Inferior goods are counter cyclical goods - this means that they are products whose demand varies inversely to the economic cycle- i.e. demand rises in a recession.

37
Q

What are examples of inferior goods?

A

Own label discounters
Bus transport
Cigarettes
Own label cereals

38
Q

What is the cross elasticity of close of unrelated products?

A

Zero.

39
Q

What is perfectly elastic supply?

A

An increase in demand can be met without any change in market price. Horizontal

40
Q

What is perfectly inelastic supply?

A

Supply is fixed and does not respond to a change in the market prices. Vertical supply

41
Q

What does an elastic supply curve look like?

A

Non-steep supply curve

42
Q

What does an inelastic supply curve look like?

A

Steep supply curve

43
Q

What does an elastic demand curve look like?

A

Non steep demand curve

44
Q

Does an inelastic demand curve look like

A

Steep demand curve