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PAPER 3 ECONOMICS > Price Determination in a Competitive Market > Flashcards

Price Determination in a Competitive Market Flashcards

1
Q

Demand?

A

The quantity of goods and services that consumers and willing and able to buy at given prices in a particular period of time

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2
Q

Effective Demand?

A

consumers’ desire to buy a good, backed by an ability to pay

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3
Q

LAW OF DEMAND

A
  • as price falls, quantity demanded rises

- inverse relationship

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4
Q

Extension in demand?

A
  • increase in quantity demanded from a fall in price
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5
Q

Contraction in demand?

A

decrease in quantity demanded from a rise in price

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6
Q

Shifts of Demand curve?

A

1) real disposable income (incomes after effects of inflation, taxation and benefits)
2) Tastes and preferences
3) Population
4) Price of Substitutes
5) Price of Compliments

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7
Q

Substitutes?

A

goods that may be consumed as an alternative to another good (competitive demand)

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8
Q

Complimenta?

A

goods tend to be consumed with another good = joint demand

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9
Q

Price Elasticity of demand?

A

responsiveness of quantity demanded of a good or service to a change in price

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10
Q

PED Equation:

A

percentage change in quantity demanded/ percentage change in price

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11
Q

price INELASTIC demand

A
  • value of PED between 0 and 1

- change in price leads to a smaller percentage change in quantity demanded

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12
Q

price ELASTIC demand

A
  • value of PED > 1

- change in price leads to a larger percentage change in quantity demanded

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13
Q

unitary ELASTIC demand

A
  • value of PED = 1

- change in change in price has led to the same percentage change in quantity demanded

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14
Q

perfectly INELASTIC demand

A
  • value of PED = 0

- change in price has led to no change in quantity demanded

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15
Q

perfectly INELASTIC demand

A
  • value of PED = infinity

- change in price has led to an infinitely larger change in quantity demanded

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16
Q

PED AND TR:

if demand is price INELASTIC (fall in price)

A
  • fall in total revenue
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17
Q

PED AND TR:

if demand is price ELASTIC (fall in price)

A
  • rise in total revenue
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18
Q

PED AND TR:

if demand is price INELASTIC (rise in price)

A
  • rise in total revenue
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19
Q

PED AND TR:

if demand is price ELASTIC (rise in price)

A
  • fall in total revenue
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20
Q

Determinants of PED:

A

1) Many close subs - many = elastic
2) Percentage of income spent on product- if accounts for large percentage of consumer income = elastic
3) Nature of the product = necessity or has addictive qualities = inelastic
4) Time period- short run = inelastic

21
Q

Income Elasticity of Demand:

A

measures the responsiveness of demand to a change in real income

22
Q

YED Equation:

A

percentage change in quantity demanded/ percentage change in real income

23
Q

if the value of YED is positive:

A

Normal good = rise in income leads to an increase in demand

24
Q

if the value of YED is negative:

A

Inferior good = rise in income leads to fall in demadn

25
income ELASTIC demand:
- value of YED is > +1 - increase in real income has led to a greater percentage increase in demand - referred to as luxury goods
26
income INELASTIC demand:
- value of YED between 0 and +1 - increase in real income has led to a smaller percentage increase in demand - referred to as basic goods
27
Negative income elasticity:
- value of YED is negative i.e less than 0 - increase in income has led to a fall in demand - referred to as inferior goods
28
cross elasticity of demand?
measures the responsiveness of the demand for a product following a change in the price of another product
29
XED Equation?
percentage change in quantity demanded of product A/ percentage change in price of product B
30
if the value of XED is positive?
substitutes | - rise in the price of B leads to a rise in demand for A
31
if the value of XED is negative?
compliments | -rise in price of product B leads to fall in demand for A
32
SUPPLY?
the quantity of a good or service that firms plan to sell at given prices in a particular time period
33
LAW OF SUPPLY:
- as price rises, quantity supplied rises - +ve relationship due to profit motive - firms want to maximize profit therefore higher prices give firms incentive for firms to increase production
34
shifts of supply curve?
1) Production costs 2) Productivity of Labour 3) Taxes on businesses 4) Production subsidies 5) Technlogy
35
Price Elasticity of Supply?
measures the responsiveness of quantity supplied of a good or service to a change in price
36
PES Equation:
percentage change in quantity supplied / percentage change in price
37
price INELASTIC supply:
- value of PES is between 0 and 1 | - change in price has led to a smaller percentage change in quantity supplied
38
price ELASTIC supply:
- value of PES > 1 | - change in price has led to a greater percentage change in quantity supplied
39
unitary ELASTIC supply:
- value of PES = 1 | - change in price has led to the same change in quantity supplied
40
perfectly INELASTIC supply:
- value of PES = 0 | - change in price has led to no change in quantity supplied
41
perfectly ELASTIC supply:
- value of PES = infinity | - change in price has led to an infinitely larger change in quantity supplied
42
Determinants of PES
1) Time taken to expand supply- longer = inelastic 2) Size of spare capacity- more can expand production = elastic 3) Available stocks- firms with stocks of finished goods respond quick to rise in price = elastic 4) Ease of switching products- = more elastic
43
Excess supply?
- occurs if price above the market equilibrium - firms forced to reduce prices - contraction in supply, extension in demand - eliminates excess supply + restores equilibrium
44
Excess demand?
- occurs if price below market equilibrium - firms increase prices - extension in supply, contraction in demand - eliminates excess demand + restores equilibrium
45
Joint demand?
goods that tend to be demanded together- as demand for one increases, so does demand for the other
46
Joint supply?
when production of one good leads to production of another good
47
Composite demand?
when a good is demanded for more than one distinct use- increase in demand for one use reduces supply available for others
48
Derived demand?
when a particular good or FoP is necessary for the provision of another good or service

PAPER 3 ECONOMICS (10 decks)

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