Price determination in a competitive market (demand)

Question 1

PED

Answer 1

Measures how much quantity demanded will respond to a change in price

Question 2

Formula for PED

Answer 2

% change in QD/ % change in price

Question 3

What happened when demand is elastic

Answer 3

Consumers are more responsive to changes in price

Question 4

when PED is between -1 and - infinity

Answer 4

its elastic

Question 5

When PED is between -1 and 0

Answer 5

It’s inelastic

Question 6

What happens when demand is inelastic

Answer 6

Consumers are unresponsive to changes in price

Question 7

What’s is unitary elastic demand

Answer 7

When PED is -1

Question 8

factors that influence PED

Answer 8

• Necessity
• Addiction
• Availiability of substitutes
• Brand loyalty
• Income
• Time period

Question 9

Are necessities inelastic or elastic

Answer 9

Inelastic, cause consumers are less responsive to a change in price as they will still demand similar quantity. This is because we can’t live without these so we will buy it regardless of the price

Question 10

Are luxuries inelastic or elastic

Answer 10

Elastic, because consumers are more responsive to a change in price as when prices increase, because consumers don’t need these, they can just stop buying it and this would decrease the quantity demanded

Question 11

Are addictive products elastic or inelastic

Answer 11

Inelastic, because if price changes, addicted consumers will be forced by their addiction to continue to demand similar quantity, so demand will not be responsive to changes price

Question 12

Are a product with less substitutes inelastic or elastic

Answer 12

Inelastic, because there are few substitutes from them, so consumers have fewer options so if the prices were to change they would still continue to demand due to low substitutes. Demand would not be responsive to a change in price.

Question 13

Are products with many substitutes elastic or inelastic

Answer 13

Elastic, because they have many substitutes and they could just switch to a different product. If the price of walkers crisps cheese & onion crisps were to increase, consumers could easily switch to other crisps, so demand would be responsive to changes in prices.

Question 14

When is total revenue maximised in PED

Answer 14

• if the product is price inelastic in demand, they should raise prices
• if the product is price elastic in demand, they should lower prices

Question 15

What is the relationship between total revenue and price elastic demand

Answer 15

• when a good is price elastic in demand, there is a greater proportional increase in QD to a decrease in price (small decrease in price leads to larger increase in QD)
• TR IS HIGHER WHEN PRICE IS DECREASED
• (EOIS)

Question 16

WHat is the relationship between total revenue and price inelastic in demand

Answer 16

• when good is price inelastic in demand, there is a smaller than proportional decrease in the quantity demanded to an increase in price (large increase in price leads to a smaller decrease in QD)
• TR IS HIGHER WHEN PRICE IS INCREASED)
• (EOIS)

Question 17

What is YED

Answer 17

Measures how much quantity demanded will respond to a change in income

Question 18

Formula for YED

Answer 18

% change in QD/ % change in income

Question 19

The relationship between inferior goods and YED

Answer 19

• the QD of an inferior good will increase, as when incomes fall consumers switch to cheaper products
• if incomes increase, the QD of inferior goods will fall as consumers will buy normal goods

Question 20

What are the figures of inferior goods

Answer 20

Always negative

Question 21

The relationship between normal goods and YED

Answer 21

• When incomes rise, the QD for normal goods will increase
• When incomes fall, the QD for normal goods will decrease

Question 22

What are the figures for normal goods

Answer 22

Always positive

Question 23

In YED, when goods are less than 1, what are they

Answer 23

income inelastic goods ( necessities) as when incomes rise we demand a similar quantity

Question 24

In YED, when goods are bigger than 1, what are they

Answer 24

income elastic goods ( luxuries ) as when incomes rises there’s a larger increase in the QD

Question 25

What is XED

Answer 25

Measures how the QD of one good (good A), will respond to a change in price of another good (good B)

Question 26

Formula of XED

Answer 26

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

Question 27

The relationship between XED and complements

Answer 27

• if there is a decrease in the price of good B, there will be an increase in QD of good A
• If there is an increase in the price of good B, the QD of good A will decrease

Question 28

What is the relationship between XED and complements (figure)

Answer 28

Always negative

Question 29

The relationship between XED and substitutes

Answer 29

• If the price of good B increased, the QD of good A would increase

Question 30

what is the relationship between XED and substitutes (figure)

Answer 30

Always positive

Question 31

what does it means when XED is ZERO

Answer 31

they are UNRELATED GOODS, have nothing to do with each other