Section 2 - Competitive Markets Flashcards
What is a market?
Anywhere buyers and sellers can exchanges goods or services
How do markets have influence on supply, demand, price and quantities?
The price changed for and quantity sold for each good or service are determined by the levels of demand and supply within the market
What is the definition of demand? + what does a demand curve show
The quality of a good/service that consumers are willing and able to buy at a given price, at a particular time
A demand curve represents 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 bought at a particular price
What is the relationship tween price and quality demanded?
Negative correlation (inverse)
What is the key language that can be used to explain the relationship between price and quantity demanded?
The law of diminishing marginal utility
What shift is there is there is an 1. Incr or 2. Decr in demand?
- Shift right
- Shift left
CAUSE OF SHIFTS FOR DEMAND FROM CHARLTON POWERPOINTS
What is the definition of a normal good?
A good which people demand more of if their real income increases. This means that a rise in real income causes demand to increase (people want to buy more of the good at each price level
What is the definition of an inferior good?
E.g. cheap clothing which people demand less of as their real income increases. Decreased demand as they’ll switch to a more expensive good instead
What does a change in price do to a demand/supply curve?
Causes movement along a curve, not a shift in the curve
What is the definition of a substitute good?
Goods which are alternatives of each other. An increase in the price of one good will lead to a decrease in the demand for it and increase the demand for its substitutes (also known as competitive demand)
What is the definition of complementary goods?
Goods that are often used together so they’re in joint demand. If the price for one increases, demand will decrease and therefore demand for the other product with also decrease
What is derived demand?
The demand for a good or FofP used in making another good or service. When the demand for a good increases as it is needed to produce a good that’s demand has increased
What is composite demand?
When goods have the same use. E.g. oil can make either plastics or fuel
What is elasticity of demand?
A measure of how much the demand for a good changes with a change in one of the key influences of demand (price, level of real income + price of another good)
What is the equation for PED?
% change in Qd / % change in price
Why is PED usually negative?
Because demand falls as price increases for most goods
What does PED have to be between to be elastic?
And why
+ what does perfectly elastic PED look like illustrated?
PED > 1
Means a % change in price will cause a larger % change in demand and the higher the PED, the more elastic
Perfectly elastic PED is a straight horizontal line (infinite PED)
What does PED have to be between to be inelastic?
And why
+ what does perfectly inelastic PED look like illustrated?
0 < PED < 1
A % change in price, will cause a smaller % change in Qd
Perfectly horizontal line (PED of 0)
What does unit elasticity mean when linked to PED?
When PED = +/- 1
When the % change in price is equal to the % change in demand
What is Income Elasticity of Demand (YED)?
Measures how much the demand for a good changes with a change in real income
What is the equation for YED?
%change in Qd of a good / % change in real income
What does YED equal if the good is inelastic?
YED < 1
What does YED equal if the good is elastic?
YED > 1
In YED, what do the + or - signs mean?
Nothing, it will always be a negative value
What is Cross Elasticity of Demand (XED)?
A measure of how the quantity demanded of one good responds to the change in the price of another good
What is the equation for XED?
% change in Qd of good A / % change in price of good B
What does it mean if PED is positive or negative?
Positive
- substitutes
Negative
- complements
What are the 4 key factors that influence the price elasticity of demand?
- Substitutes
- Type of good/service
- % of income spent on good
- Time
CONTINUE P20
P21
What is the definition of supply?
+ what does the supply curve show
The quantity of a good or service that producers supply to the market at a given price, at any particular time
The relationship between price and quantity supplied
Which direction does the supply curve move when there is an 1. Increase or 2. Decrease in supply
Increase = shift left
Decrease = shift right
WHAT CAN CAUSE SHIFTS TO A SUPPLY CURVE…. NNED TO FILL IN
What is joint supply?
Is when the production of one good or service involves the production of another (or several others) - interrelated markets. E.g. if crude oil is refined to make petrol, this will also increase the supply of butane (which is made in the process)
What is competitive supply?
Is where two (or more) alternative goods can be produced from the same factors of production (land, labour, capital). E.g. growing potato’s or wheat on the same land
P24 ONWARDS
