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Microeconomics > Price Determination In A Competitive Market > Flashcards

Price Determination In A Competitive Market Flashcards

1
Q

Describe unitary elastic demand?

A

Percentage change in demand equal to percentage change in price

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2
Q

Describe strong subsitutes?

In terms of demand and price for good X and good Y

A

Small rise in price of X caused a large rise in demand for Y

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3
Q

What is cross elasticity of demand?

A

Cross elasticity of demand between two goods or services indicates the nature of demand relationships between the goods

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4
Q

What income elasticity of demand does a basic good have?

A

Income elasticity of demand is between zero and one

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5
Q

Describe time period?

A

More sensitive to price over long periods of time

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6
Q

When price is unit elastic (1) and a firm raises prices, what happens to revenue?

A

Total revenue remains the same

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7
Q

Equation of cross elasticity of demand?

A

% change in quantity of A demanded
/
% change in the price of B

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8
Q

When price elasticity of demand is one, what is it?

A

Demand is unit elastic

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9
Q

What does elastic price elasticity of supply mean?

A

Firms can increase supply quickly at little cost

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10
Q

Describe basic goods income elasticity of demand?

A

Smaller rate of rise when income increases

E.g. Shoe polish

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11
Q

When price elastic and a firm raises its prices, what happens to total revenue?

A

Total revenue decreases

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12
Q

What is unit elastic?

A

% change in demand is the same as % change in price

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13
Q

When goods are substitute what is their demand described as?

A

Joint demand

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14
Q

Describe superior good’s income elasticity of demand?

A

They have a greater rate of rise when income increases

E.g. Luxury car

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15
Q

Define inelastic demand?

A

If total consumer expenditure remains constant in response to a price fall, demand is inelastic

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16
Q

Descrive perfectly inelastic demand (0)?

A

Demand does not change when price changes

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17
Q

Describe income?

A

Proportion of income spent on good

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18
Q

Equation for income elasticity of demand?

A

% change in quantity demanded
/
% change in income

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19
Q

Describe strong complement?

In terms of demand for good X and good Y

A

Small fall in price for X causes large rise in demand for Y

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20
Q

Factors that determine price elasticity of supply?

A 
Spare capacity (spare resources / full capacity)
Time scale (short run inelastic / long run elastic eg employing more capital)
Substitutability factors (ability to change way to produce goods)
Level of stocks (storage / diverting current production)
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21
Q

When price elasticity of demand is between zero and one, what is it?

A

Demand is inelastic

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22
Q

Describe substitutes?

A

More viable substitutes, more demand is going to be sensitive to change in price

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23
Q

When price elasticity of demand is zero, what is it?

A

Demand is perfectly inelastic

24
Q

Describe weak substitute?

In terms of demand and price for good E and good F

A

Large rise in price of E caused a small increase in demand for F

25
Q

What does perfectly inelastic price elasticity of supply mean?

A

Supply is fixed so if there is a change in demand it can’t be easily met

26
Q

Descrive price elasticity of demand between zero and one (inelastic)?

A

The percentage change in demand is less than the percentage change in price

27
Q

What is the formula for cross price elasticity of demand?

A

Percentage change in quantity demand for A
/
Percentage change in price of B

28
Q

When price is elastic and a firm lowers its price, what happens to revenue?

A

Total revenue increases

29
Q

What would tend to make the price elasticity of demand for a product low?

A

Good is essential
Good has few substitutes
Product has strong brand name
Good only takes a small share of incomes

30
Q

Describe perfectly elastic demand (when the value is above 1)?

A

Demand is affected to a greater degree by changes in price

31
Q

Formula for price elasticity of demand?

A

Change in quantity
/
Change in price

32
Q

Describe weak complement?

In terms of demand for good E and good F

A

Large drop in price of E causes only a small rise in demand for F

33
Q

What does perfectly elastic price elasticity of supply mean?

A

Any quantity demanded can be met without changing the price

34
Q

What does income elasticity of demand depend on?

A

Whether the good is
Normal
Or inferior

35
Q

Price elasticity of inelastic and a firm raises its price, what happens to revenue?

A

Total revenue increases

36
Q

What does inelastic price elasticity of supply mean?

A

An increase in supply will be expensive for firms and takes a long time

37
Q

What is the formula for total revenue?

A

Quantity times price

38
Q

Examples of goods with a strong positive income elasticity of demand?

A

Fine wine
Sports cars
Consumer durables e.g. Smart phones
Leisure facilities

39
Q

What is the formula for income elasticity of demand?

A

Percentage change in demand
/
Percentage change in income

40
Q

What is the formula for price elasticity of supply?

A

Percentage change in quantity supplied
/
Percentage change in price

41
Q

When do inferior goods exist?

A

When superior goods are available

42
Q

When demand is inelastic, describe revenue?

A

A rise in price leads to a rise in total revenue

43
Q

Determinants of price elasticity of demand?

A

Habit formation
Income
Time period
Substitutes

44
Q

Describe a price elasticity of demand between zero and one relationship?

A

% change in demand from A to B is smaller than the percentage change in price

45
Q

What income elasticity of demand does a superior good have?

A

Income elasticity of demand is greater than 1

46
Q

Describe habit formation?

A

Addiction to product

Brand loyalty to product

47
Q

Do substitute goods have positive or negative cross elasticity of demand?

A

Positive cross elasticity of demand

If the price increases demand for that good will fall as consumers switch to another brand

48
Q

What is price elasticity of demand?

A

Sensitivity or responsiveness of quality demanded of a good or service to a change in its price

49
Q

price elasticity of demand of 0?

A

demand does not change when price changes

demand is perfectly inelastic

50
Q

composite demand

A

demanded for two or more distinct uses

51
Q

when does an increase in the goods price increase total consumption?

A

when price elasticity of demand for a good is less than one

52
Q

what does the imposition of a tax do?

A

shifts supply curve of a good to the left

53
Q

what does the abolition of a tax on a good do?

A

shifts the supply curve of the good to the right

54
Q

incentive function of prices

A

motivates a producer or consumer to do something

producers provided with possibility of more revenue and profit

55
Q

signalling function of prices

A 
signals to firms and consumers 
rise in price following a rise in demand signals more good is required
incentive to join market 
make higher profits 
scarce resources allocated to market
56
Q

rationing function of prices

A

increase in price of good as it becomes more scarce
consumers rationed out of market
no longer afford good

Microeconomics (5 decks)

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