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Microeconomics > Price determination in a competitive market > Flashcards

Price determination in a competitive market Flashcards

1
Q

What does the demand curve show?

A

the relationship between quantity demanded and price

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2
Q

What are substitute goods?

A

-An increase in the price of one good will increase the quantity demanded of the other

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3
Q

What are complement goods?

A

-An increase in the price of one good will cause a decrease in the quantity demanded of the other

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4
Q

What is the income effect?

A

When prices fall, consumers can afford a greater quantity of goods and services (assuming income is fixed). So demand for these goods and services increases

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5
Q

What is the substitution effect?

A

When the price of one good falls, consumers will buy more of the cheaper good or service and less of the more costly good or service. So demand for the cheaper good will increase; demand for the costlier good decreases

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6
Q

What does the law of demand show?

A

the inverse relationship between price and quantity, assuming all other variables are constant

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7
Q

What is willingness to pay?

A

desire to pay based on tastes and preferences

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8
Q

What is ability to pay?

A

factors in a persons income, and whether they can afford the good or service or not

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9
Q

Why does the demand curve shift right?

A

if there is an increase in demand for the good at each price level e.g. if a product were to suddenly become more popular

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10
Q

what does an increased income mean for quantity demanded for normal and inferior goods?

A

Normal good- increase in quantity demanded
Inferior good- Reduction in quantity demanded

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11
Q

What does a change in price cause?

A

Cause movements along the curve. A rise in price will lead to a demand contraction whilst a decrease in price will lead to a demand extension

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12
Q

What does elasticity measure?

A

the responsiveness of one variable to the change in another variable

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13
Q

What is the equation for price elasticity of demand?

A

%change in quantity demanded/%change in price

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14
Q

What is the PED for elastic, inelastic, and unitary price elasticity of demand

A

elastic=PED<-1
inelastic=PED>-1
unitary=PED=-1

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15
Q

What is the income elasticity for normal and inferior goods?

A

Normal goods-positive
Inferior goods-negative

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16
Q

What is cross-price elasticity of demand?

A

when a change in the price of one good can change the quantity demanded of another

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17
Q

What does it suggest if the XED is close to zero?

A

the goods are unrelated

18
Q

What does perfectly elastic demand mean?

A

PED=+/- infinity, and price increase will cause demand to drop to zero

19
Q

What does perfectly inelastic demand mean?

A

PED=0, any price change wont affect demand

20
Q

How can maximum revenue be achieved for a product with elastic demand?

A

cut the price

21
Q

How can maximum revenue be achieved for a product with inelastic demand?

A

raise the price

22
Q

How can maximum revenue be achieved for a product with unitary elasticity?

A

any percentage change will be offset by an equivalent percentage change in quantity demanded, so for moderate price changes revenue will not grow

23
Q

What affects the elasticity of demand?

A

-Percentage of income-the higher the proportion of income spent, the more elastic the good or service is
-Time- goods tend to be more price elastic in the long run because time can be devoted to searching for appropriate alternatives
-availability of substitutes- the more substitutes there are available, the more price elastic a good is
-Type of good- addictive goods tend to be more price inelastic because a change in price is unlikely to affect quantity significantly

24
Q

What is total revenue?

A

price per unit x quantity

25
Q

What is PED at zero demand or high price?

A

minus infinity

26
Q

What is PED at midpoint?

A

minus one

27
Q

What is PED at zero price or high quantity?

A

zero

28
Q

Where is total revenue maximised?

A

at a PED of +/- one, the closer a products price is to the midpoint, the higher the revenue

29
Q

What factors affect the supply of goods and services?

A

-Price of the good
-Technology and production
-Productivity and tax

30
Q

How does the price of a good or service affect quantity supplied?

A

A rise in price will almost always lead to an increase in the quantity supplied of that good or service, AKA an extension in supply. This is because the increase in price incentivizes the firm to increase output. Economists call this positive relationship ‘the law of supply’

31
Q

How does technology and production affect the quantity supplied of a good or service?

A

A reduction in the costs of production will lead to an increase in supply because producer profits have risen. Technological improvements can increase the efficiency of the productive process. This will reduce the costs of production, shifting supply to the right.

32
Q

How does productivity and tax affect the quantity supplied of a good or service?

A

Increases in productivity means the output per input of a factor of supply increases, so supply shifts right. An indirect tax on supply raises the overall cost of production, shifting supply left.

33
Q

What is elastic supply?

A

PES>1, so a higher PES means more elastic supply

34
Q

What is inelastic supply?

A

1>PES>0, so a smaller PES value means more inelastic supply

35
Q

What is unit elasticity of supply?

A

PES=1, percentage change in quantity supplied=percentage change in price

36
Q

Why is a high elasticity of supply desirable for a firm?

A

so they can react rapidly to changes in price and demand

37
Q

What can firms do to increase elasticity of supply?

A

-improve their technology
-introduce flexible working patterns
-have excess production capacity

38
Q

How does agility affect price elasticity of supply?

A

Firms that are agile keep high levels of stock, this makes supply price elastic as they can quickly respond to increases in demand by releasing more stock. More generally, firms with agile factor mobility will be more price elastic in supply.

39
Q

What does price elasticity of supply look like for perishable goods?

A

products that are likely to perish because weather conditions will have a more inelastic supply

40
Q

Productivity

A

How much output is produced by a factor of production

41
Q

Labour productivity

A

How much output is produced by labour in a given period of time

42
Q

Division of labour

A

When we split up the production process into smaller tasks and allow workers to specialise

Microeconomics (10 decks)

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