Section 2: Competitive Markets Flashcards
What are markets?
Where goods and services and brought and sold
What are sub-markets?
They are smaller markets that make up a market
E.g labour market made out of smaller markets for teachers, engineers and doctors
The price charged for and quantity sold for each good or service is determined by…
Supply and demand
What are the levels of supply and demand determined by?
Diagrams which demonstrate the price level and quantity demanded/supplied of goods and services
What is demand?
The quantity of a good/service that consumers are willing and able to buy at a given price at a particular
What a demand curve?
Shows the relationship between price and quantity demanded
-at any given point along the curve it shows the quantity of the good or service that would be brought at a particular price
What does it mean when the demand curve slopes downwards?
-it means that the higher the price charged for a good, the lower the quantity demanded
In general what do customers aim for?
To pay the lowest price possible for goods and services
As prices decrease….
More consumers a willing and able to purchase a good or service
Lower prices means ….
Higher demand
How can you describe the relationship between price and quantity demand?
The law or diminishing marginal utility
Income effect
Substitution effect
Describe the income effect?
(Assuming a fixed level of income)
the income effect means that as a price falls the amount that consumers can buy with their income increases and so the demand increases
What is the substitution effect?
-a fall in the price of a good makes it relatively cheaper than other goods, so consumers will increase demand for a cheaper good and reduce demand for expensive good
Changes in demand cause?
A shift in the demand curve
What does it mean when the demand curve moves left?
There is a decrease in the amount demanded at every price
When does it mean when the demand curves moves right?
Increase in the amount demanded at every price
Changes in taste and fashion can cause demand curves?
-shifts to the right if something is popular
-shifts to the left if something is out of fashion
What are the two factors that can cause a shift in the demand curve?
-fashion
-changes to people’s real income
Changes in one market….
Can affect demand in other markets
What are interrelated markets?
-one market affect a related market
What are substitute goods?
Goods which are alternate to each other (beef and lamb)
-an increase price for one will decrease the demand for it and increase the demand for its substitutes(competitive demand)
What are complementary goods?
Goods that are often used together, so they’re in joint demand
E.g strawberries with cream
What is derived demand?
Is the demand for a good or a factor of production used in making another good or service
-increase in the demand of fencing-increase derived demand for wood
What is composite demand?
Some goods having more than one used
What is elasticity of demand?
A measure of how much the demand for a good changes with a change of one of the key influences on demand
What is the price elasticity of demand?(PED)
A measure of how the quantity demanded of a good responds to a change in its price
How can the price elasticity of demand(PED) be calculated?
Percentage change in quantity demanded/percentage change in price
PED can be ….
-elastic
-inelastic
-unit elastic
How do you know if the good is elastic?
If the value of PED is greater than 1, the demand for the good is elastic
The higher the value of the PED…
The more elastic the demand is for the good
What factors influence the price elasticity of demand?
-substitutes
-type of good
-percentage of income spend on good
-time
How does the type of good influence the price elasticity of demand?
-demand for essential items is price inelastic but demand for non-essential items is elastic
-demand for goods that are habit forming tend to be price inelastic
-demand for purchases than cannot be postponed tends to be price inelastic
-demand for products with several uses tend to be price inelastic
How does time influence the price elasticity of demand?
-in the long run demand becomes price elastic as it becomes easier to change to alternatives because consumers have had time to shop around
How does percentage of income spend on goods influence the price elasticity of demand?
-demand for products that need a large proportion of the consumers income is more price elastic then demand for products that only need a small proportion of income
How does substitutes influence the price elasticity of demand?
-the more substitutes a good has, the more price elastic the demand is (if there are many substitutes available than consumers can easily switch to so,etching els if the price rises
-the number of substitutes of a good depends on how closely it is defined
What is effective demand?
Desire to buy a good or a service and willingness to pay for it
What can cause changes in the demand curve?
Left or right
-real income
-fashion(seasonality eg tastes)
-price of complementary goods
-external shocks
-substitute goods (competition)
-derived demand(wood is used for fencing)
-composite demand(goods have more than one use-demand curve for fuel leads to changes in demand curve for plastics)
What is composite demand?
-composite demand(goods have more than one use-demand curve for fuel leads to changes in demand curve for plastics)
What is the most important factor in moving along the demand curve
Prices(everything comes under prices)
-everything els is shifting it left or right
What is the law of diminishing marginal utility?
The decrease of satisfaction due to overconsumption (added consumption of each item)
Describe normal goods supply and demand?
Prices increase, demand decreases
Prices decreases, demand increases
What are inferior goods?
Goods which people demand less of when their real income increases. Rise in real income causes demand curve to shift to the left
What are giffen goods (Collectors items)
They defy the laws of demand e.g paintings
-buy expensive products, sell them for more
Derived demand?
Demanding something(wood) for what it can do for you fences
What does a movement along the demand curve show?
A movement a,on the demand curve shows how quantity demanded responds to a change in price
What is meant by a shift in the demand curve?
Shows how demand responds to a change in a non-price factor at any given price
What is the proportional rise in demand to proportional rise in price known as
Unity
A
What is elasticity of demand in simplistic terms?
Consumers responsiveness not a change in the goods price
Where there are substitutes the demand curve is very …
Elastic
