Price determination in a competitive market

Question 1

Definition of demand

Answer 1

The quantity of goods/services that consumers are willing and able to consume at a given price and a given time.

Question 2

Determinants of Demand (PASIFIC)

Answer 2

P - Population - Can affect the quantity demanded to provide for the population.
A - Advertising - Good advertising can increase Qd visa versa.
S - Substitute price - If substitutes are cheaper Qd decreases.
I - Income - If income increases people are able to consume more.
F - Fashion - If a good is fashionable, Qd will increase.
I - Interest Rates - If interest rates are low people more likely to spend
C - Complement’s Price - If complementary goods are cheap people are more likely to buy

Question 3

Normal goods

Answer 3

A good that consumers demand more of when their incomes increase, YED = 0

Question 4

Inferior Goods

Answer 4

A good that consumers demand less of when their incomes increase. YED = -0

Question 5

Superior Goods

Answer 5

A good for which demand increases at a greater rate than real income when income rises, YED = 1

Question 6

PED Calculation

Answer 6

PED = %change in Qd / %change in P

Question 7

PES Calculation

Answer 7

PES = %change Qs / %change in P

Question 8

XED Calculation

Answer 8

XED = % change Qd (Good X) / % change in P (Good Y)

Question 9

YED Calculation

Answer 9

YED = %change in Qd / %change in Real Income

Question 10

Interpretation of PED / PES (5)

Answer 10

PED = 0 - 1 = Inelastic

PED = 1- ∞ =Elastic

PED = 1 = Unitary

PED = 0 = Perfectly Inelastic

PED = ∞ = Perfectly Elastic

Question 11

Causes of interrelated markets (5)

Answer 11

Competitive Demand
Joint Demand
Derived Demand
Composite Demand
Joint Supply

Question 12

Competitive Demand

Answer 12

Demand for goods which fulfil similar needs and wants, so these goods can be substituted and provide similar/ the same utility. Eg. Pepsi and CocaCola.

Question 13

Joint Demand

Answer 13

Demand for goods which tend to be consumed together, demand for complementary goods. Eg. Printers and Ink.

Question 14

Derived Demand

Answer 14

Demand for a good which is used to meet another demand, so when demand for one good or service increases, derived demand will increase the demand for the goods needed to produce it. Eg. Labour demand is derived from demand for goods and services.

Question 15

Composite Demand

Answer 15

Demand for a good which has multiple different uses. Eg. Milk (raw material) is demanded for Milk, Cheese, Yogurt.

Question 16

Joint Supply

Answer 16

Supply of multiple goods tends to be produced through a single operation or process such that the goods are produced together. Eg. Cows - Meats, Leather, Milk.

Question 17

Interpretation of XED (3)

Answer 17

Positive XED = Substitute Goods
Negative XED = Complementary Goods
c. 0 XED = No relationship

Question 18

Interpretation of YED (3)

Answer 18

Negative YED = Inferior good.
YED > 1 = Luxury/ Superior Good.
YED 1- 0 = Normal Good

Question 19

Determinants of PED (4)

Answer 19

Presence of substitutes ?
Type of good - eg. addictive / essential ?
Percentage of Income
Time - LR = more elastic

Question 20

Total Revenue + PED

Answer 20

Total Revenue is maximised when PED = 1

If PED is elastic, a reduction in price will increase TR

If PED is inelastic, a reduction in price will decrease TR

Question 21

Determinants of PES (5)

Answer 21

Production Lag
Substitutable Factors
Spare capacity
Stock Level
Time Scale

Question 22

Market Mechanisms (4)

Answer 22

Signalling - Signals whether price is too high or low

Allocation - How are scarce resources allocated

Rationing - Excess demand is rationed

Incentive - to change price