Price determination in a competitive market

Question 1

What does the demand curve show

Answer 1

The relationship between price and quantity demanded

Question 2

Where is equilibrium price

Answer 2

Where demand meets supply

Question 3

Competitive markets

Answer 3

Markets with a high number of buyers and sellers, good market information, easy barriers to E/E

Question 4

Effective demand

Answer 4

Demand backed up by the ability to pay

Question 5

What causes a shift in the demand curve

Answer 5

Changes in price
Disposable income
Changes in trends/fashion

Question 6

Conditions of demand

Answer 6

Price of substitute goods
Price of complimentary goods
Personal income
Tastes + preferences
Population size

Question 7

What would cause a rightward shift in demand

Answer 7

Increase in price of substitute
Fall in the price of complimentary good
Increase in disposable income
Successful advertising campaigns
Increase in population

Question 8

Substitute good

Answer 8

Alternative goods that can be used for the same purpose

Question 9

Complementary goods

Answer 9

Joint demand

Question 10

Shifts

Answer 10

Increased demand = rightward shift
Decreased demand = leftward shift

Question 11

Normal good

Answer 11

A good which demand increases as income rises and decreases when income falls (e.g: demand for branded good and cars increases as incomes rise)

Question 12

Inferior good

Answer 12

Demand decreases as incomes rise (e.g: demand for bus travel and store branded foods decrease as income’s increase)

Question 13

PED formula

Answer 13

PED = %change in QD ➗ % change in P

Question 14

YED formula

Answer 14

YED= % change in QD ➗ % change in income

Question 15

XED formula

Answer 15

%change in QD of good A ➗ %change in price of good B

Question 16

PED = 0

Answer 16

Perfectly inelastic, change in price won’t affect the demand

Question 17

PED = ♾️

Answer 17

Perfectly elastic, any change in price will lead to demand falling to 0

Question 18

PED>1

Answer 18

Elastic demand, small price changes lead to large quantity changes

Question 19

PED = 1

Answer 19

Unitary elasticity, equal changes in P&Q

Question 20

PED<1

Answer 20

Inelastic demand, large price changes lead to small quantity changes

Question 21

Factors determining PED

Answer 21

Substitutability
Percentage of income
Necessities or luxuries
Time

Question 22

What YED depends on

Answer 22

If the good is normal or inferior

Question 23

YED<0

Answer 23

Negative YED means the good is inferior

Question 24

YED>0

Answer 24

Positive YED means the good is normal

Question 25

Types of XED

Answer 25

Complimentary Substitutes An a sense of any discernible demand relationship

Question 26

What does the supply curve show

Answer 26

The quantity of a good or service that all the firms in a market plan to sell at a given price

Question 27

Profit

Answer 27

Total sales revenue - total cost of production

Question 28

Total revenue

Answer 28

Quantity sold x price

Question 29

Conditions of supply

Answer 29

Costs of production (wages, raw materials, energy and borrowing) Technical progress Taxes Subsidies

Question 30

Price elasticity of supply

Answer 30

PES = %change in QS ➗ %change in price

Question 31

Elastic supply

Answer 31

PES is elastic when the supply curve intersects the y-axis

Question 32

Inelastic supply

Answer 32

PES is inelastic when it intersects the x-axis

Question 33

Unitary supply

Answer 33

PES is unitary elastic when the supply curve cuts through the origin

Question 34

Factors determining PES

Answer 34

Length of production period Availability of spare capacity Ease of accumulating stocks Ease of switching methods of production Time

Question 35

Excess supply

Answer 35

Where price level is above market equilibrium and supply exceeds demand

Question 36

Excess demand

Answer 36

Where price is below market equilibrium and the demand exceeds supply

Question 37

Joint supply

Answer 37

When one good is produced, another is produced as a byproduct from the same materials e.g: increased demand for beef and leads to a higher supply of leather produced

Question 38

Joint demand

Answer 38

Complimentary goods, sub goods. E.g: prise increase of a PS console leads to a fall in demand for PS controllers and a rise in demand for XBox consoles

Question 39

Composite demand

Answer 39

Demand for a good that has, more than 1 use, increased demand for one leads to a reduction in supply of the good for an alternative use

Question 40

Derived demand

Answer 40

The demand for a good occurs when a good is necessary for the production of other goods e.g: if demand for cars falls then so will the demand for engines and gear boxes