Price determination in a competitive market

Question 1

What is a market

Answer 1

a market is a voluntary meeting of buyers and sellers in which exchange takes place

Question 2

What is a competitive market

Answer 2

it is when there are a large number of buyers and sellers who accept the market price not by their own decision but by everyone who takes part in the market

Question 3

What do high competition do to barriers of entry and exit

Answer 3

they lack entry and exit which means buyers and sellers can easily enter the market

Question 4

Do competitive markers have a high degree of transparency? Explain the term.

Answer 4

Yes competitive market have a high degree of transparency- buyers and sellers can quickly find out what everyone else in the market is doing

Question 5

What is demand

Answer 5

the quantity of good and services that consumers are willing and able to buy at a given price in a given period of time

Question 6

What is supply

Answer 6

the quantity of a good or service that producers are willing and able to sell at a given period of time

Question 7

What does a demand curve show

Answer 7

shows the relationship between the price of a good or service and the quantity of the good or service demanded at difference prices.

Question 8

What is market demand

Answer 8

the quantity of good or service that all consumers in the market wish to, and are able to, buy at different prices

Question 9

What is individual demand

Answer 9

the quantity that a particular individual would like to buy

Question 10

When does a movement along a demand curve happen

Answer 10

takes place when the goods price changes.

Question 11

What are other ways to say movement along a demand curve

Answer 11

extension and contraction

Question 12

What is the ceteris paribus assumption

Answer 12

assuming that all other variables that may influence demand are held unchanged or constant

Question 13

What are the conditions of demand aka what shifts the demand curve to a new position (5)

Answer 13

-the prices of a substitute good
-prices of a complementary good
-personal income
-tastes and preferences
-population size

Question 14

What is a substitute good

Answer 14

an alternative good that could be used for the same purpose

Question 15

what is a complementary good

Answer 15

when two goods are complements, they experience joint demand

Question 16

What is a normal good

Answer 16

a good for which demand increases as income rises and demand decreases as income falls

Question 17

What is an inferior good

Answer 17

a good for which demand decreases as income rises and demand increases as income falls

Question 18

What is elasticity

Answer 18

measures the responsiveness of a second variable to a change in the first variable

Question 19

What does it mean if demand is elastic vs inelastic

Answer 19

inelatic is when price changes demand does not change

elastic is when price increase demand decrease and vice versa

Question 20

What are the three demand elasticities you must know

Answer 20

-price elasticity of demand
-income elasticity of demand
-cross-elasticity of demand

Question 21

What is the formula for price elasticity of demand

Answer 21

percentage change in quantity demanded/ percentage change in price

Question 22

What is the formula for income elasticity of demand

Answer 22

percentage change in quantity demanded/ percentage change in income

Question 23

What is cross-elasticity of demand formula

Answer 23

percentage change in quantity of A demanded/ percentage change in price of B

Question 24

What is price elasticity of demand

Answer 24

measures consumers’ responsiveness to a change in a good’s price

Question 25

What does a horizontal demand curve show

Answer 25

perfectly elastic demand

Question 26

What does a vertical demand curve show

Answer 26

perfectly inelastic demand

Question 27

What is unit elastic of demand

Answer 27

it is when supply and demand of a product changes proportionally (by the exact same amount) to the change in price

Question 28

What factors determine price elasticity of demand

Answer 28

-substitute -income -necessities or luxuries -size of the market -time

Question 29

What is income elasticity of demand

Answer 29

measures how demand responds to a change in income- depends on whether the good is a normal good or an inferior good

Question 30

When is income elasticity of demand positive or negative

Answer 30

positive for a normal good negative for an inferior good

Question 31

What can normal goods be further divided into

Answer 31

superior goods or luxuries

Question 32

What is cross elasticity of demand

Answer 32

measures how the demand for one good responds to changes in the price of another good

Question 33

What are three possible relationships of cross-elasticity of demand

Answer 33

complementary good (or joint demand) substitutes (or competing demand) no significant relationship between the goods

Question 34

What is market supply

Answer 34

Market supply is the quantity of a good or service that all firms or producers in the market plan to sell at different prices

Question 35

What is profit

Answer 35

the difference between the total revenue the firm receives when selling the goods or services it produces and the cost of producing the good

Question 36

What could shift the supply curve to a new position (4)

Answer 36

cost of production technology taxes subsidies

Question 37

What is the only supply elasticity you need to know

Answer 37

price elasticity of supply

Question 38

What is the formula for price elasticity of supply

Answer 38

percentage change in quantity supplied/percentage change in price

Question 39

What does it mean if the supply curve intersects the price axis

Answer 39

the curve is elastic at all points and elasticity decreases as you move up the curve

Question 40

What does it mean if the supply curve intersects the quantity axis

Answer 40

the curve is inelastic at all points and elasticity increases as you move up the curve

Question 41

What does it mean if the supply curve passes through the origin

Answer 41

elasticity = 1 on all points on the curve

Question 42

What is market equilibrium

Answer 42

when planned demand equals planned supply aka when demand crosses supply

Question 43

What is excess supply

Answer 43

when firms wish to sell more than consumers which to buy with the price above the equilibrium price

Question 44

what is excess demand

Answer 44

when consumers wish to buy more than firms wish to sell, with the price below the equilibrium price

Question 45

What is joint supply

Answer 45

when production of one good leads to the supply of another good eg killing more cows increases supply for leather

Question 46

What is joint demand

Answer 46

an increase in demand for one good increases demand for another good

Question 47

what is composite demand

Answer 47

demand for a good which has more than one use eg crude oil

Question 48

what is derived demand

Answer 48

when a good is necessary for the production of another good eg machinery and raw materials