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Economics MICRO > Price Determination in a Competitive Market > Flashcards

Price Determination in a Competitive Market Flashcards

1
Q

what is demand ?

A

the quantity of a good or service that consumers are willing and able to buy at a given price during a given period of time.

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2
Q

what causes movement (extension, contraction) along the demand curve ?

A

a change in price

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3
Q

what causes an extension along the demand curve, leading to QD increasing ?

A

fall in price

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4
Q

what causes a contraction along the demand curve, leading to QD decreasing ?

A

rise in price

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5
Q

what is the acronym for remembering the factors that cause a shift in demand ?

A

PIRATES

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6
Q

what does PIRATES stand for ?

A

Population
Income
Related goods
Advertising
Taste/ fashion
Expectations
Seasons

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7
Q

what is diminishing marginal utility ?

A

as one extra unit is consumed the utility gained from that decreases.

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8
Q

what is price elasticity of demand (PED) ?

A

the responsiveness of a change in demand to a change in price.

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9
Q

what is the formula for PED ?

A

(%change in demand/ %change in price)

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10
Q

what does it mean if a product is elastic ?

A

high responsiveness to a change in d to a change in p

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11
Q

what does it mean if a product is inelastic ?

A

low responsiveness to a change in d to a change in p

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12
Q

what would the PED of a elastic product be ?

A

less than 1 (>1)

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13
Q

what would the PED of a inelastic product be ?

A

more than 1 (1<)

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14
Q

what would a perfectly elastic demand curve look like ?

A

completely horizontal

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15
Q

what would a perfectly inelastic demand curve look like ?

A

completely vertical

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16
Q

what are the factors influencing PED ?

A

necessities
substitutes
addictiveness
proportion of income
durability of good

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17
Q

how does indirect tax impact elastic goods ?

A

producers have to internalize the burden

prices rise, demand will fall

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18
Q

how does indirect tax effect the consumers purchasing the inelastic goods ?

A

consumers have to internalize the burden

prices rise, higher cost to pay

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19
Q

how does subsidies effect producers and consumers ?

A

producers - higher revenue

consumers- lower prices

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20
Q

what is income elasticity of demand (YED) ?

A

is the responsiveness of a change in demand to a change in income.

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21
Q

what is the formulae for YED ?

A

(%change in demand/ %change in income)

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22
Q

what is an inferior good ?

A

if income rises
demand falls

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23
Q

what is a normal good ?

A

if income rises
demand rises

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24
Q

what is a luxury good ?

A

if income rises
demand rises significantly

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25
Q

what is cross elasticity of demand (XED) ?

A

is the responsiveness of a change in demand of good X to a change in the price of good Y.

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26
Q

what is the formulae of XED ?

A

(%change in demand of good X/ %change in price of good Y)

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27
Q

what is a complementary ?

A

price increases of good X
demand falls of good X&Y

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28
Q

what is a substitute ?

A

price increases of good X
demand increases of good Y

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29
Q

what is supply ?

A

is the quantity of a good or service a producer is willing and able to supply at a given price during a given time period

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30
Q

what causes a change in quantity supplied ?

A

price of FOP

31
Q

if there is an outward shift in supply what does that mean ?

A

more goods are supplied at a given price

32
Q

if there is an inward shift in supply what does that mean ?

A

less goods are supplied at a given price

33
Q

what is the acronym for factors that cause a shift in supply ?

A

PINTSWC

34
Q

what does PINTSWC stand for ?

A

Productivity
Indirect taxes
Number of firms
Technology
Subsidies
Weather
Costs of production

35
Q

what is effective demand ?

A

demand whereby the customers can actually afford the good or service, they have the ability to pay.

36
Q

what is ineffective demand ?

A

demand whereby the customers cannot actually afford the good or service, they don’t have the ability to pay.

37
Q

what does the law of demand state ?

A

that there is an inverse relationship between price and quantity demanded

when price falls, QD rises
when price rises, QD falls

38
Q

what is the supply curve a graphical representation of ?

A

the price and quantity supplied by producers

39
Q

why is the supply curve upward sloping ?

A

because as the price of goods and services increases, the profits of the firms supplying these goods will increase. As a result, suppliers are more willing and able to supply a greater quantity.

40
Q

what does the law of supply state ?

A

that there is a positive relationship between price and QS

41
Q

in a market system, how are prices determined ?

A

by the interaction of demand and supply

42
Q

what happens at the market equilibrium price ?

A

sellers will be satisfied with the rate and quantity

buyers will be satisfied with utility that product provides

43
Q

where is there market equilibrium on a diagram ?

A

demand = supply

44
Q

where does market disequilibrium occur ?

A

any price above or below the equilibrium point

45
Q

what occurs when there is a market disequilibrium ?

A

excess demand
or
excess supply

46
Q

why does an excess demand occur ?

A

prices may be too low

47
Q

why does an excess supply occur ?

A

prices may be too high

48
Q

when price is below the equilibrium what will there be ?

A

a surplus

49
Q

when price is above the equilibrium what will there be ?

A

a shortage of demand

50
Q

what does the price elasticity of demand reveal to us ?

A

how responsive the change in quantity demanded is to a change in price

51
Q

how do you calculate a percentage change ?

A

% change = (new value - old value/ old value) x 100

52
Q

if a product has perfectly inelastic demand what does that mean ?

and what does that look like on a diagram ?

A

the quantity demanded for that product will not change regardless if there is a change in price

a vertically straight line

53
Q

if a product has perfectly elastic demand what does that mean ?

and what does that look like on a diagram ?

A

price will not change and therefore nor will the quantity demanded for product

a horizontally straight line

54
Q

why is it important for firms to be aware of the price elasticity of the products that they are selling ?

A

if a product is price inelastic, firms can increase there prices to maximise revenue

if a product is price elastic, firms may decrease there prices to maximise revenue

55
Q

what are the factors that influence PED ?

A

Availability of substitutes

Addictiveness, turns products into necessities, resulting in a low value of PED (relatively inelastic)

Price of product as a proportion of income

Time period, In the short term, consumers are less responsive to price increases

56
Q

if a good has a positive YED of 0-1, what type of good is it likely to be ?

A

a normal good

57
Q

if a good has a positive YED greater than 1, what type of good is it likely to be ?

A

a luxury good

58
Q

if a good has a negative YED less than 0, what type of good is it likely to be ?

A

an inferior good

59
Q

if a good has a positive XED greater than 0, what type of good is it likely to be ?

A

a substitute

60
Q

if a good has a negative XED of less than 0, what type of good is it likely to be ?

A

a complementary good

61
Q

what is the definition of price elasticity of supply (PES) ?

A

how responsive the change in quantity supplied is to a change in price

62
Q

what is the formula for PES ?

A

(% change in QS / % change in price)

63
Q

if the value pf PES is 0 what does that reveal to us ?

A

a perfectly inelastic relationship

64
Q

if the value pf PES is 0-1 what does that reveal to us ?

A

relatively inelastic

65
Q

if the value pf PES is 1-infinity what does that reveal to us ?

A

relatively elastic

66
Q

if the value pf PES is infinity what does that reveal to us ?

A

perfectly elastic

67
Q

what are the 5 factors that influence PES ?

A

mobility of the factors of production

the rate at which costs of production increase

ability to store goods

spare capacity

time period

68
Q

what are the 5 different types of interrelationships between markets ?

A

joint demand

competitive demand

composite demand

derived demand

joint supply

69
Q

what is joint demand ?

A

when consumers use two products together also known as complementary goods

the change in price of one good impacts the demand for the other good

70
Q

what is competitive demand ?

A

where two goods are used for the same purpose, also known as substitute goods

The change in price of one good impacts the demand for the other good

71
Q

what is composite demand ?

A

two or more good require the same input to make them

an increase in the production of one good could lead to a decrease in the supply of another good, less input is available

72
Q

what is derived demand ?

A

demand for a good or service arises from the demand for another good or service

73
Q

what is joint supply ?

A

the supply of two different goods stems from the same source

the increase in production of one good will increase the production of another good

Economics MICRO (8 decks)

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