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Paper 1 Microeconomics > Price Determination In A Competitive Market > Flashcards

Price Determination In A Competitive Market Flashcards

1
Q

What is a market?

A

A market is a place where consumers and sellers interact, in order to trade goods and services at a price level.
This can be either physical or e-commerce.

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2
Q

What is a competitive market?

A

A market where there is a large number of potential buyers and sellers, who are all individually powerless to influence the market price.

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3
Q

Equilibrium price is..

A

The price at which supply and demand are equal.

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4
Q

What is demand?

A

The quantity of a good or service that consumers are willing and able to buy at a given price, in a particular time period.

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5
Q

Effective demand is consumers desire..

A

..to buy a good, backed up by the ability to pay, rather than an unfulfilled want.

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6
Q

What is the law of demand?

A

The law of demand states the inverse relationship between price and quantity demanded.
Price increase= demand decrease
Price decrease= demand increase

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7
Q

Ceteris paribus is the assumption that..

A

All other things remain constant. When analysing a change in the economy we assume ceteris paribus.

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8
Q

Shifts ALONG the demand curve are caused by?

A

Price only

• An increase in price causes a contraction in demand.
• A decrease in price causes an extension in demand.

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9
Q

What are the 7 shifts OF the demand curve ( acronym)

A

PIRATES

Population and demographic
Income
Related goods- subs and complements
Advertising
Tastes and preferences
Expectations
Seasonal changes

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10
Q

What is disposable income and how does it shift demand?

A

Disposable incomes are individuals incomes after taxation, inflation and benefits have been deducted.

An increase in disposable incomes me people have more money left over to spend, resulting in a greater demand for good and services.
This can be shown by an outward shift of the demand curve from D1 to D2 resulting in an increase in quantity demand from Q1 to Q2.
Conversely, as disposable incomes decrease, people will have less to spend, so demand will shift to the left, causing a decrease in quantity demanded

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11
Q

How does taste, trends and preferences affect demand?

A

Societal changes, expectations and popularity can influence the demand for a good or service. For instance, when a new product becomes trendy or fashionable, people tend to conform to society’s changes in behaviour and demand the new product. Therefore, the demand curve will see a rightwards shift, causing an increase in quantity demanded.

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12
Q

How can population affect demand?

A

The size and demographics of a population can affect market demand. This is because a larger population generally increases demand as more people are available to purchase goods and services. Whereas a smaller population tends to decrease demand

• Changes in demographics such as an aging population, may increase the demand for healthcare products/services, shifting the demand curve to the right.

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13
Q

What are substitute goods and how do they affect demand?

A

Substitute goods are goods that are in competitive demand that can be used as an alternative for another good/service e.g Pepsi and coke

If the price of one good increases, demand will contract as people will switch to the substitute good. The demand curve for the substitute will shift right, showing an increase in demand.

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14
Q

What are complementary goods and how do they affect demand?

A

Complementary goods are good that tend to be consumed together- they are in joint demand E.g printers and ink.
• If the price of one good decreases, people may begin buying it more, thus demand for the complementary good will also rise.
• Conversely, if the price for the good increase, demand will shift inwards, causing a decrease in demand the the complementary good.

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15
Q

What is price elasticity of demand and how to calculate it?

A

Price elasticity of demand reveres the the responsiveness of quantity demanded of a good or service to a change in price.

PED= % change in Q.D
————————————
% change in price

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16
Q

How to calculate percentage change

A

New - original
—————— x100
Original

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17
Q

Price inelastic means when..

A

A change in price leads to a smaller change in quantity demanded.

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18
Q

When demand for a product is price inelastic (after ignoring the minus sign) the PED is between

A

0 and 1

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19
Q

Price elasticity is when..

A

a small change in price leads to a larger change in quantity demanded

20
Q

When demand for a product is price elastic (after ignoring the minus sign) the PED is..

A

Greater (>) than 1

21
Q

What is unitary elastic demand?

A

Unitary elastic demand is when a change in price leads to the same % change in quantity demanded

22
Q

When demand is unitary elastic (after ignoring the minute sign) PED is..

A

Exactly 1

23
Q

Perfectly inelastic demand is when..

A

the change in price has led to no change in quantity demanded

24
Q

When demand for a product is perfectly price inelastic (after ignoring the minus sign) the PED is..

A

0

25
Q

Perfectly elastic demand is when..

A

A change in price has led to an infinitely large change in quantity demanded.

26
Q

When demand for a product is perfectly price elastic (after ignoring the minus sign) the PED is..

A

Infinite♾️

27
Q

If demand is price elastic and there is an increase in price.. (include diagram)

A

total revenue decreases because consumers respond significantly by buying much less, which outweighs the gain from the higher price.

  • elastic demand curve showing expansion in demand
28
Q

If price is inelastic and there is an increase in price.. (include diagram)

A

consumers are unresponsive and continue to buy almost the same quantity even at the higher price. So the higher price per unit outweighs the small decrease in quantity demanded, leading to an increase in total revenue.

  • Inelastic demand curve showing an small contraction in demand
29
Q

If demand is price elastic and there is an decrease in price.. (include diagram)

A

total revenue increases because there will be a large increase in quantity demanded
- elastic demand curve showing expansion in demand

30
Q

If demand is price inelastic and price reduces.. (include diagram)

A

the quantity demanded only increases slightly in response to the lower price. However, the lower price per unit reduces revenue more than the small increase in quantity can compensate for, so total revenue decreases.

  • inelastic demand curve showing a small expansion in demand.
31
Q

What are the determinants of price elasticity of demand (acronym)

A

Substitutes
Proportion of income
Luxury vs necessity
Addictiveness
Time period

32
Q

How does substitutes affect PED

A

The more substitutes available for a good, the more elastic the demand, as consumers can easily switch if the price rises.

33
Q

How does proportion of income affect PED

A

Goods that take up a larger proportion of a consumer’s income tend to have more elastic demand. This is because they may not be willing to purchase the good that has an increase in price if it takes up a large proportion of their income

34
Q

How does luxury vs necessity affected PED

A

Necessities tend to have inelastic demand, as people need them regardless of price, while luxuries have more elastic demand.

35
Q

How does addictiveness affect PED

A

Goods that are addictive (like tobacco) tend to have inelastic demand, as consumers will buy them despite price changes.

36
Q

How does time periods affect PED

A

Demand is usually more elastic in the long run, as consumers have more time to adjust their behavior or find alternatives. Economic conditions in the long run, such as inflation, may encourage consumers to find substitutes and adjust their spending

However, in the short run consumers have limited time to find substitutes and may continue to buy the necessary goods

37
Q

Income elasticity of demand measures..

A

The responsiveness of quantity demanded to changes in real income

38
Q

Income elasticity of demand formula

A

YED= % change in QD
—————————
% change in real income

39
Q

Two types of goods and definitions

A

Normal goods- tends to be luxury/ branded goods which are more in demand as incomes rise.

Inferior goods- tends to be alternatives to expensive goods and are more in demand when incomes decrease

40
Q

If YED IS positive (>1)

A

The good is a normal good

41
Q

If YED is negative (<1)

A

The good is an inferior good

42
Q

When demand for a product is income elastic..

A
  • The value of PED is >1
  • An increase in income has led to a greater increase in q.d
  • These are often referred to as luxury goods
43
Q

When demand for a product is income, inelastic..

A
  • The value of PED is between 0 and 1
  • An increase in income has led to a smaller increase in q.d
  • Often referred to as necessities or basic goods
44
Q

When demand for a product is negative income elastic..

A
  • YED is <0
  • An increase in income leads to a greater fall in q.d
  • These are often referred to as inferior goods
45
Q

What is cross elasticity of demand?

A

XED measures the responsiveness of q.d for a good following a change in price of another good

46
Q

XED= % change in q.d of good A
—————————————
% change in price of good B

A

Measures the responsiveness of q.d for a product following a change in price of good B

47
Q

If XED is positive.. (<1)

A

This indicates products A and B are substitutes.
A rise in price of product B leads to an increase in demand for product A

Paper 1 Microeconomics (4 decks)

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