Price determination in a competitive market

Question 1

What is a market?

Answer 1

An arrangement where buyers and sellers meet to trade.

Question 2

What is the equilibrium point?

Answer 2

Where supply and demand meet to provide the equilibrium price and quantity. This is the price at which all the goods being produced are being bought and every demand is being met.

Question 3

Define demand.

Answer 3

The amount of a good or service that consumers are willing and able to buy at a given price at a given time.

Question 4

What is the relationship between demand and price?

Answer 4

Inverse relationship - as price increases quantity demanded decreases = downward sloping.

Question 5

What is derived demand?

Answer 5

The demand for a good or service which results from the demand for a different, related good or service - exists when a particular good or factor of production is used in the production of another good/service. e.g. labour.

Question 6

What is composite demand?

Answer 6

Occurs when goods or services have multiple uses so an increase in the demand for one product leads to a decrease in supply of another. e.g. milk = cheese, yoghurt, cream e.t.c so more milk used up on cheese then less supply of milk to be used to produce yoghurt/cream.

Question 7

What impact do price changes have on the demand curve?

Answer 7

Movement up or down

Question 8

What impact does a change in non-price factors have on the demand curve?

Answer 8

Shift the curve itself either left or right, as price remains constant but something else is changing the quantity demanded.

Question 9

Name some determinants of demand.

Answer 9

Income, advertising/publicity, fashion/trends, quality, season, law, uncertainty about future prices, price of compliments, price of substitutes.

Question 10

What is a substitute good?

Answer 10

Goods which do roughly the same thing e.g tea and coffee. If the price of one goes up the demand for the other goes up.

Question 11

What is a complementary good?

Answer 11

Goods which are used together e.g. bread and butter. When the price for one goes up the demand for the other goes down.

Question 12

Define supply.

Answer 12

The amount of a good or service that producers are willing and able to sell at a given price at a given time.

Question 13

What is the relationship between price and quantity supplied?

Answer 13

As producers seek to profit maximise, ceteris paribus, as prices increase they will be willing to sell more so there is a positive relationship between price and supply - As price increases supply decreases.

Question 14

Lists some determinants of supply.

Answer 14

Cost of raw materials, technology, labour productivity, government regulation, wages, tax/subsidies, firms entering/leaving the market, expectations of future prices.

Question 15

What is joint supply?

Answer 15

Refers to a process or product which yields two or more outputs. e.g. cows can be utilised for milk, beef and hide.

Question 16

Describe the term market mechanism.

Answer 16

The way in which consumers and producers meet and interact in order to establish an equilibrium price and quantity.

Question 17

Why must any price change without a change in supply or demand be temporary?

Answer 17

(e.g incr) Increased prices will cause a fall in demand causing excess supply so prices are bid down until equilibrium is met.

Question 18

How is a new equilibrium price created by a shift in demand (e.g. incomes rise)?

Answer 18

Demand shifts right, so there is a shortage of supply at the current price (excess demand). Therefore, prices are forced upwards until quantity demanded falls and quantity supplied rises and a new equilibrium point is reached.

Question 19

What do you need to remember when drawing multiple shifts?

Answer 19

• We still need to draw new and old equilibrium.
• Although one variable (price/quantity) will make a definite movement the other may increase, decrease or stay the same depending on the size of the respective shifts. Therefore only draw on the certain variable whilst keeping the other the same.
• Check notes 12/10/23 if lost.

Question 20

Multiple shifts ————»»» (e.g) What would happen to the market for own-brand food if incomes increased whilst taxes on producers fell.

Answer 20

• Incomes increase so demand decreases (inferior good) D1 shifts left to D2.
• As taxes on producers fall, cost of production decreases and the ability and willingness of producers to supply the food so supply shifts right from S1 to S2.
• As they both happen at the same time, price decreases from P1 to P2 but we don’t know what happens to quantity.

Question 24

What is an inferior good?

Answer 24

Goods with a negative YED, so as people earn more money the demand for these goods increases e.g. bus travel.