Price determination competitive markets

Question 1

Equilibrium price

Answer 1

EP- price at which planned demand for a good or service exactly planned supply

Question 2

Supply

Answer 2

S- quantity of good and services a firm is willing and able to produce at a given price in a given time period

Question 3

Demand

Answer 3

D- quantity of good and services that consumers are willing and able to buy at a given price over a given period of time.
-Law- as a goods price falls more is demanded, an inverse relatonship
->Downward slope due to income and substitution effect

Question 4

Determinants of demand

Non-price factors PASIFIC

Answer 4

Population
Advertising
Substitutes price
Income
Fashion
Interest Rates
Complements price

Shift the curve

Question 5

Normal goods

Answer 5

N- a good for which demand increases when incomes rise and decreases when incomes fall

Question 6

Inferior good

Answer 6

In- a good for which demand decreases as incomes rise and increases when incomes fall

Question 7

Price Elasticity of Demand

Answer 7

PED- measures the extent to which the demand for a good changes in response to a change in price

Question 8

PED equation

Answer 8

PED= /\Qd% / /\P%

Question 9

Income Elasticity of Demand

Answer 9

YED- measures the extent to which the demand for a good changes in response to a change in income

Question 10

Cross-Elasticity of Demand

Answer 10

XED- measures the extent to which the demand for a good changes in response to a change in price of another good

Question 11

XED equation

Answer 11

XED= /\Qa% / /\Pb%

Positive= substitutes, Negative= complements

Question 12

Determinants of PED

SPLAT

Answer 12

Substitutes (No.)
Percentage of Income
Luxury/ necessity
Addictive/ habitual
Time period

Question 13

Determinants of supply

Non price factors- PINTSWC

Answer 13

*Productivity (Labour + capital)
*Indirect Tax
No. Firms
*Technology
*Subsidy
Weather
*Costs of production

*=direct

Shifts curve

Question 14

Costs of production

Answer 14

-Regulation (taxes)
-Cost of borrowing (interest)
-Wages
-Raw materials
-technical progress

Question 15

Price Elasticity of Supply

Answer 15

PES- extent to which the supply of a good changes in response to a change in price

Question 16

PES equation

Answer 16

PES= /\Qs% / /\P%

Question 17

Determinants of PES

PSSST

Answer 17

-Production lag
-Stock
-Spare capacity
-Substitutability of FoPs
-Time- adapt long run production process

FoPs- factors of production

Question 18

PES Values

Answer 18

<1- inelastic
>1-elastic
0- perfectly inelastic
00- perfectly elastic
1- unit elastic

Question 19

Types of demand

JCLED

Answer 19

Joint- demand for one product generates demand for another
Composite- demand for one good reduces supply of another (relate to PPF)
Latent- consumer demand with no purchasing power from the consumer
Effective- demand backed up by consumer willingness and ability to pay
Derived- demand for one good or service which is a factor input for another

Question 20

4 Function of Price Mechanism

Answer 20

Allocating- scarce resources efficiently
Rationing- encourage/ discourage consumption
Signalling- existence of shortages/ surplus
Incentivising- producers to chance output

Question 21

Draw graph eliminating excess supply

Question 22

Draw graph eliminating a shortage

Question 23

Draw diagram showing rev gain for a firm lowering prices when PED is elastic

Question 24

Draw diagram showing rev gain for a firm raising prices when PED is inelastic

Question 25

Significance of XED

Answer 25

Provides nature of goods produced (sub or comp) aswell as the closeness of relationship

Question 26

Example of non price competition | Use

Answer 26

Advertising, quality, Customer service, brand development | To reduce substitutability, encourage loyalty

Question 27

Significance of YED

Answer 27

Displays relationship of demand between demand and income, firms can prpare for expected booms or recessions

Question 28

Criticisms of Elasticity for decision making

Answer 28

Only estimates (not fully reflect current consumer habits) Assumption of ceterus paribus (only one variable)