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Economics > Price determination in a competitive market > Flashcards

Price determination in a competitive market Flashcards

1
Q

What is a market?

A

A market is created when there is a voluntary exchange of goods or services between buyers and sellers.

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2
Q

What are the three characteristics of a competitive market?

A

-there is a large number of buyers and sellers
-all possess good market information
-can easily enter or leave the market

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3
Q

How is the price of a good in a competitive market determined?

A

The price of a good in a competitive market is determined by the market forces of demand and supply and how they interact.

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4
Q

What is the definition of demand?

A

Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.

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5
Q

What is individual demand?

A

Individual demand is the quantity of a good or service that a particular individual is willing and able to pay.

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6
Q

What is market demand?

A

Market demand is the quantity of a good or service that all consumers in a market are willing and able to buy.

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7
Q

What is the law of demand and what can be said about it?

A

The law of demand is that as the price of a good or service increases, the quantity demanded decreases. The relationship between price and quantity is inverse.

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8
Q

What causes a movement along the demand curve?

A

any change in price of a good or service

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9
Q

What is a movement up/down the demand curve called?

A

extension/contraction

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10
Q

What are the conditions of demand?

A

-price of substitute goods
-customer’s taste and preference
-customer’s future expectation
-income
-price of complementary goods

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11
Q

What are the exceptions to the law of demand?

A

-veblen goods
-speculative demand
-goods for which price is an indicator of quality

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12
Q

What does price elasticity of demand mean?

A

the responsiveness of quantity demanded to a change in price

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13
Q

What is the equation for PED?

A

% change in quantity demanded
————————————————
% change in price

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14
Q

What does it mean when a good or service has elastic demand?

A

A change in price causes a larger than proportional change in quantity demanded (PED = greater than 1)

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15
Q

What does it mean when a good or service is price inelastic?

A

A change in price causes a smaller than proportional change in quantity demanded (PED = less than 1)

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16
Q

What is the equation for revenue?

A

revenue = price x quantity sold

17
Q

What are the factors determining PED?

A

-availability of substitutes
-cost of switching
-breadth of definition
-degree of necessity
-time frame
-brand loyalty
-percentage of income
-habit-forming products

18
Q

What are the values for PED for different graphs?

A

-inelastic = less than 1
-elastic = more than 1
-perfectly elastic = infinity
-perfectly inelastic = 0
-unitary elastic = 1

19
Q

What is income elasticity of demand?

A

The responsiveness of quantity demanded to a change in income.

20
Q

What is the equation for YED?

A

% change in quantity demanded
————————————————
% change in income

21
Q

What is a normal and inferior good?

A

-An inferior good is a good for which demand decreases as income increases
-A normal good is a good for which demand rises as income rises

22
Q

What are the values for YED for normal goods, luxury goods and inferior goods?

A

-normal goods (necessity) = 0 < YED <1
-normal good (luxury) = YED > 1
-inferior good = YED < 0

23
Q

What is cross elasticity of demand?

A

the responsiveness of quantity demanded of one good (good A) to a change in the price of another good (good B)

24
Q

What is the equation for XED?

A

% change in quantity demanded of good A
———————————————————
% change in price of good B

25
Q

What does an XED value greater than 0 signify?

A

the two goods are substitutes and so an increase in the price of one good (good A) will lead to a rise in demand for a substitute good (good B)

26
Q

What does an XED value less than 0 signify?

A

the two goods are complements and so an increase in the price of one good (good A) will lead to a fall in demand for a complementary good (good B)

27
Q

What does an XED value of 0 signify?

A

that there is no apparent demand relationship and so an increase in the price of one good (good A) has no effect on the quantity demanded of another good (good B)

28
Q

What is the definition of supply?

A

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

29
Q

What is the law of supply?

A

The law of supply states that as the price of a good or service increases, quantity supplied increases (a positive relationship)

30
Q

What are the conditions of supply?

A

-costs of production
-state of technology
-price of related goods
-government policies
-climate conditions

31
Q

What is the equation for PES?

A

% change in quantity supplied
——————————————
% change in price

32
Q

What does it mean when a good or service has elastic supply?

A

A change in the price of a good causes a larger than proportional change in quantity supplied (PES = greater than 1)

33
Q

What does it mean when a good or service has inelastic supply?

A

A change in the price of a good causes a smaller than proportional change in quantity supplied (PES = less than 1)

34
Q

What are the factors determining PES?

A

-are resource inputs readily available?
-are factors mobile (eg are workers prepared to move to where they are needed?)
-can finished products be easily stored, and are there existing stocks?
-is production running at full capacity?
-how long and complex is the production cycle or production process?

35
Q

When will supply tend to be more price elastic?

A

-supplier has plenty of spare capacity to increase output
-high stock levels are immediately available to meet rising demand
-there is a short production time frame to get extra products to the market
-ease of factor substitution is high i.e. resources can be reallocated easily

36
Q

What is market equilibrium?

A

Market equilibrium occurs where market supply equals market demand. At market demand, the market has cleared and there is no excess demand or excess supply.

37
Q

What is achieved at market equilibrium?

A

Allocative efficiency where supply meets demand, indicating that production is aligned with consumer preferences.

38
Q

When is a market in disequilibrium?

A

-when there is excess supply (firms wish to sell more than consumers wish to buy, with the price above the equilibrium price)
-where there is excess demand (consumers wish to buy more than firms wish to sell, with the price below the equilibrium price)

Economics (5 decks)

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