Price Determination in a Competitive Market

Question 1

Causes of shifts in the demand curve

Answer 1

PIRATES
Population
Income
Related goods
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Tastes and fashions
Expectations
Seasons

Question 2

Formula for Price Elasticity of Demand

Answer 2

PED = %Δ in Quantity Demanded / %Δ in Price

Question 3

Formula for Income Elasticity of Demand

Answer 3

YED = %Δ in Quantity Demanded / %Δ in Income

Question 4

Formula for Cross Elasticity of Demand

Answer 4

XED = %Δ in Quantity Demand of good X / %Δ in Price of good Y

Question 5

Inferior Goods

Answer 5

Those which see a fall in demand as income increases. YED < 0

Question 6

Normal Goods

Answer 6

Demand increases as income increases. YED >0

Question 7

Luxury Goods

Answer 7

An increase in income causes an even bigger increase in demand.
YED > 1

Question 8

Complementary Goods

Answer 8

If one good becomes more expensive,
the quantity demanded for both goods will fall. XED < 0

Question 9

Substitute Goods

Answer 9

Can replace another good, so the XED is positive and the demand curve is
upward sloping.

Question 10

The Relationship between Price Elasticity of Demand and Total Revenue

Answer 10

If a good has an inelastic demand, the firm can raise its price, and quantity sold will
not fall significantly. This will increase total revenue. If a good has an elastic demand and the firm raises its price, quantity sold will fall. This will reduce total revenue.

Question 11

Factors that influence elasticities of demand

Answer 11

1. Availability of Substitutes
2. Necessity v Luxury
3. Time
4. Consumer Preferences

Question 12

Causes of shifts in the Supply Curve

Answer 12

1. Cost of Production
2. Productivity
3. Indirect Taxes
4. Number of Firms
5. Technology
6. Subsidies
7. Weather

Question 13

Formula for Price Elasticity of Supply

Answer 13

PES = %Δ in Quantity Supplies / %Δ in Price

Question 14

Factors influencing PES

Answer 14

1. Time Scale
2. Spare Capacity
3. Level of Stock
4. How Sustainable Factors are
5. Barrier to Entry to the market

Question 15

Equilibrium

Answer 15

Supply = Demand

Question 16

Disequilibrium

Answer 16

Supply ≠ Demand

Question 17

Joint Demand

Answer 17

This is when goods are bought together, e.g. digital cameras and memory cards

Question 18

Competitive Demand

Answer 18

When there is other available alternatives to fufil the same consumer wants/ needs

Question 19

Composite Demand

Answer 19

When the good demanded has more that one use

Question 20

Derived Demand

Answer 20

This is when the demand for one good is linked to the demand for
a related good e.g. the demand for bricks and the demand for housing

Question 21

Joint supply

Answer 21

This is when increasing the supply of one good causes an increase or
decrease in the supply of another good, e.g. producing more lamb will
increase the supply of wool