price determination in the competitive market

Question 1

demand

Answer 1

is when no one can be made better off without making
someone else worse off.

( if the price is lower the demand will increase)

Question 2

expansion of demand.

Answer 2

when a higher price is qset a lower quantity will be demanded

Question 3

what causes as shift in demand curve

Answer 3

what causes as shift in demand curve

Question 4

P in pirates

Answer 4

Population

The larger the population, the higher the demand. Changing
the structure of the population also affects demand, such as the distribution
of different age groups.

Question 5

I in pirates

Answer 5

Income.

w If consumers have more disposable income, they are able to afford
more goods, so demand increases. Also, a consumer’s wealth affects their
demand. Consumers generally spend more as they perceive their wealth to
increase. Likewise, consumers spend less when they believe their wealth will
decrease.

Question 6

R in pirates

Answer 6

Related goods

Related goods are substitutes or complements. A
substitute can replace another good, such as two different brands of TV. If
the price of the substitute falls, the quantity demanded of the original good
will fall because consumers will switch to the cheaper option. A complement
goes with another good, such as strawberries and cream. If the price of
strawberries increases, the demand for cream will fall because fewer people
will be buying strawberries, and hence fewer people will be buying cream.

Question 7

A in pirates

Answer 7

Advertising.

This will increase consumer loyalty to the good and increase
demand.

Question 8

T in pirates

Answer 8

Tastes and fashions.

The demand curve will also shift if consumer tastes
change. For example, the demand for physical books might fall, if consumers
start preferring to read e-books.

Question 9

E in pirates

Answer 9

Expectations

This is of future price changes. If speculators expect the
price of shares in a company to increase in the future, demand is likely to
increase in the present.

Question 10

s in pirates

Answer 10

Seasons.

Demand changes according to the season. For example, in the
summer, the demand for ice cream and sun lotions increases.

Question 11

why is the demand curve downwards sloping

Answer 11

shows the inverse relationship between price and quantity.

Question 12

The law of diminishing marginal utility

Answer 12

states that as an extra unit of the good is consumed, the benefit derived from consuming the good falls. therefore consumers are willing to pay less for the good

Question 13

The law of diminishing marginal utility (EXAMPLE)

Answer 13

This can be explained using the example of chocolate. The first chocolate bar will
benefit the consumer more, because it satisfies more of their needs, and so the
consumer is willing to pay more for it. The second bar will satisfy the consumer less,
because they have less need for it, and the consumer will be willing to pay less for it.
Eventually the utility derived will become zero.

Question 14

price elasticity of demand

Answer 14

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

Question 15

formula for PED

Answer 15

PED = %change in quantity demanded/ %change in price

Question 16

numerical value for elastic demand

Answer 16

> 1

Question 17

numerical value for inelastic demand

Answer 17

<1

Question 18

numerical value for a unitary elastic good

Answer 18

1

Question 19

numerical value for a perfectly inelastic good

Answer 19

0

Question 20

numerical value for a perfectly elastic good

Answer 20

infinite

Question 21

factors that effects PED

Answer 21

necessity
substitutes
addictiveness/habitual consumption
proportion of income spent on the good
durability of the good
peak and off peak demand

Question 22

necessities and the effect on PED

Answer 22

items such as bread or electricity will have relatively inelastic demand. this means that even if price increases significantly consumers will still demand bread and electricity

Question 23

substitutes and the effect on PED

Answer 23

If the good has several substitutes, such as Android phones instead of iPhones, then
the demand is more price elastic. The elasticity can also change within markets. For
example, the market for bread is less elastic than the market for white bread.

Question 24

Addictiveness or habitual consumption and the effect on PED

Answer 24

The demand for goods such as cigarettes is not sensitive to a change in price because
consumers become addicted to them, and therefore continue demanding the
cigarettes, even if the price increases

Question 25

Proportion of income spent on the good and the effect on PED

Answer 25

If the good only takes up a small proportion of income, such as a magazine which increases in price from £1.50 to £2, demand is likely to be relatively price inelastic. If the good takes up a significant proportion of income, such as a car which increases in price from £15,000 to £20,000, the demand is likely to be more price elastic.

Question 26

Durability of the good and the effect on PED

Answer 26

A good which lasts a long time, such a washing machine, has a more elastic demand because consumers wait to buy another one.

Question 27

Peak and off-peak demand and the effect on PED

Answer 27

During peak times, such as 9am and 5pm for trains, the demand for tickets is more price inelastic.

Question 28

impact of indirect tax

Answer 28

will fall differently on consumers and firms, depending on if the good has an elastic or inelastic demand. It is important to note, however, that taxes shift the supply curve, not the demand curve.

Question 29

what happens if a firm sells a good with elastic demand

Answer 29

they are likely to take most of the tax burden upon themselves. This is because they know if the price of the good increases, demand is likely to fall, which will lower their overall revenue.

Question 30

subsidies

Answer 30

a payment from the government to firms to encourage the production of a good and to lower their average costs

Question 31

benefits of subsidies

Answer 31

it increases supply can increase revenue from the business or lower prices for consumers

Question 32

total revenue

Answer 32

equal to average price times quantity sold. TR= P x Q

Question 33

If a good has an inelastic demand ?

Answer 33

the firm can raise its price, and quantity sold will not fall significantly. This will increase total revenue

Question 34

If a good has an elastic demand ?

Answer 34

and the firm raises its price, quantity sold will fall. This will reduce total revenue.

Question 35

normal goods

Answer 35

YED >0 demand increases as income increases

Question 36

luxury goods

Answer 36

, an increase in income causes an even bigger increase in demand. YED > 1. For example, a holiday is a luxury good. Luxury goods are also normal goods, and they have an elastic income.

Question 37

what happens during economic growth

Answer 37

firms might switch to producing more luxury goods and fewer inferior goods, because demand for luxury goods will be increasing

Question 38

cross elasticity of demand

Answer 38

Cross elasticity of demand is the responsiveness of a change in demand of one good, X, to a change in price of another good, Y.

Question 39

formula of cross elasticity of demand

Answer 39

XED = % change of QD of X / % change in P of Y

Question 40

complementary good

Answer 40

Complementary goods have a negative XED. If one good becomes more expensive, the quantity demanded for both goods will fall.

Question 41

YED formula

Answer 41

%change of QD / %change of income

Question 42

YED

Answer 42

Income elasticity of demand is the responsiveness of a change in demand to a change in income

Question 43

Weak complements

Answer 43

a large fall in the price of good X leads to only a small increase in QD of Y

Question 44

Substitutes can replace another good so ?

Answer 44

so the XED is positive and the demand curve is upward sloping. If the price of one brand of TV increases, consumers might switch to another brand.

Question 45

Close substitutes

Answer 45

: a small increase in the price of good X leads to a large increase in QD of Y.

Question 46

Weak substitutes

Answer 46

: a large increase in the price of good X leads to a smaller increase in QD of Y.

Question 47

Unrelated goods

Answer 47

have a XED equal to zero. For example, the price of a bus journey has no effect on the demand for tables.

Question 48

Supply

Answer 48

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

Question 49

things that effect supply (PINTSWC)

Answer 49

P- Productivity. Higher productivity causes an outward shift in supply, because average costs for the firm fall I- Indirect taxes. Inward shift in supply. N- Number of firms. The more firms there are, the larger the supply. T- Technology. More advanced the technology causes an outward shift in supply S- Subsidies. Subsidies cause an outward shift in supply. W- Weather. This is particularly for agricultural produce. Favourable conditions will increase supply. C- Costs of production. If costs of production fall, the firm can afford to supply more. If costs rise, such as with higher wages, there will be an inward shift in supply. Also, depreciation in the exchange rate will increase the cost of imports, which will cause an inward shift in supply.

Question 50

Price elasticity of supply

Answer 50

The price elasticity of supply is the responsiveness of a change in supply to a change in price.

Question 51

formula

Answer 51

PES = %change of quantity of supply / %change in price

Question 52

elastic supply number

Answer 52

If supply is elastic, firms can increase supply quickly at little cost. The numerical value for PES is >1.

Question 53

inelastic supply number

Answer 53

If supply is inelastic, an increase in supply will be expensive for firms and take a long time. PES is <1.

Question 54

Supply is perfectly elastic when PES?

Answer 54

infinity.

Question 55

Factors influencing PES:

Answer 55

1) Time scale: In the short run, supply is more price inelastic, because producers cannot quickly increase supply. In the long run, supply becomes more price elastic 2) Spare capacity: If the firm is operating at full capacity, there is no space left to increase supply. If there are spare resources, for example in a recession there are lots of spare and unemployed resources, supply can be increased quickly. 3) Level of stocks: If goods can be stored, such as CDs, firms can stock them and increase market supply easily. If the goods are perishable, such as apples, firms cannot stock them for long so supply is more inelastic. 4) How substitutable factors are: If labour and capital are mobile, supply is more price elastic because resources can be allocated to where extra supply is needed. For example, if workers have transferable skills, they can be reallocated to produce a different good and increase the supply of it. 5) Barriers to entry to the market: Higher barriers to entry means supply is more price inelastic, because it is difficult for new firms to enter and supply the m

Question 56

Equilibrium price and quantity

Answer 56

This is when supply meets demand. is known as the market clearing price.

Question 57

Excess demand

Answer 57

Demand is now greater than supply. This is a state of disequilibrium.

Question 58

shortage in the market.

Answer 58

This pushes prices up and causes firms to supply more. Since prices increase, demand will contract. Once supply meets demand again, price will reach the market clearing price, P1.

Question 59

Excess supply

Answer 59

This is when price is above P1.

Question 60

New market equilibriums

Answer 60

When the demand or supply curves shift due to the PIRATES or PINTSWC reasons, new market equilibriums are established.

Question 61

Types of demand:

Answer 61

Derived demand Composite demand Joint demand

Question 62

derived demand

Answer 62

This is when the demand for one good is linked to the demand for a related good. For example, the demand for bricks is derived from the demand for the building of new houses. The demand for labour is derived from the goods the labour produces. For example, if the demand for cars increases, the demand for the labour to produce those cars will increase.

Question 63

Composite demand

Answer 63

This is when the good demanded has more than one use. An example could be milk. Assuming there is a fixed supply of milk, an increase in the demand for cheese will mean that more cheese is supplied, and therefore less butter can be supplied

Question 64

Joint demand:

Answer 64

This is when goods are bought together, such as a digital camera and a memory card. An increase in demand for digital cameras is likely to lead to an increase in demand for memory cards.

Question 65

types of supply

Answer 65

joint supply

Question 66

joint supply

Answer 66

This is when increasing the supply of one good causes an increase or decrease in the supply of another good. For example, producing more lamb will increase the supply of wool.