Section 2: Competitive Markets

Question 1

What is derived demand?

Answer 1

When the demand for a product, or factor of production, is determined by the demand for a
different product.

Question 2

What is composite demand?

Answer 2

When a product has more than one use so that an increase in the demand for one use leads
to a fall in the supply of the product that is available to use elsewhere.

Question 3

What is joint demand?

Answer 3

When two products are demanded together (complimentary goods) so that the demand for one product is directly
related to the demand for the other product.

Question 4

What is competitive demand?

Answer 4

When the demand for one product increases the demand for another product decreases. (such as substitute goods).

Question 5

What is joint supply?

Answer 5

When the output of one product also results in the output of a different product.

Question 6

4 examples of complimentary goods

Answer 6

Bread and butter, cheese and crackers, strawberries and cream, cars and petrol .

Question 7

What are the factors that shift the demand curve? (PASIFIC)

Answer 7

Population change, Advertising and promotion, price of Substitutes, Income change, Fashion and tastes, Interest rates, price of Complementary goods

Question 8

What is price elasticity of demand?

Answer 8

A measure of how the quantity demanded of a good responds to a change in its price.
PED = (percentage change in quantity demanded) / (percentage change in price)

Question 9

Is a PED of -0.83 elastic or inelastic?

Answer 9

Inelastic

Question 10

What range of values is PED elastic (ignoring minus) ?

Answer 10

PED>1

Question 11

What range of values is PED inelastic (ignoring minus)?

Answer 11

0<PED<1

Question 12

What does a PED +/- 1 mean

Answer 12

A good has a unit elasticity of demand, the size of % chance in demand = size of % change in price.

Question 13

What does a PED of 0 mean?

Answer 13

Perfectly inelastic demand, any change in price will have no effect on demand.

Question 14

What does a PED of +/- infinity mean?

Answer 14

Perfectly elastic demand, and increase in price means demand will fall to 0

Question 15

What factors influence price elasticity of demand?

Answer 15

No. Substitutes, (more subs = more elastic), type of good/service (essential = inelastic, non essential=elastic), percentage of income spent on good, long run (elastic), short tun (inelastic).

Question 16

At what PED level is revenue maximised and why?

Answer 16

+/- 1, due to n shape of revenue curve, the nearer a firm sets price to midpoint of demand curve, the higher the total revenue will be.

Question 17

For a good with elastic demand, what will the change in revenue be for:
a) a reduction in price
b) an increase in price

Answer 17

a) reduction in price increases total revenue
b) increase in price reduces total revenue

Question 18

For a good with inelastic demand, what will the change in revenue be for:
a) a reduction in price
b) an increase in price

Answer 18

a) a reduction in price will reduce total revenue
b) an increase in price will increase total revenue

Question 19

What factors cause a shift in the supply curve? (PINTSWC)

Answer 19

Productivity
Indirect taxes
No. Firms
Technology
Subsidies
Weather
Costs of production (other)

Question 20

What is the definition of supply?

Answer 20

Supply 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 21

What is the definition of income elasticities of demand?

Answer 21

A measure of the extent to which the quantity demanded of a product changes in response to a change in income.

Question 22

What is the definition of cross elasticities of demand?

Answer 22

A measure of the extent to which the quantity demanded of a product changes in response to a change in the price of a different product

Question 23

What is the formula for income elasticity of demand (YED)?

Answer 23

Question 24

What is the formula for cross elasticity of demand (XED)?

Answer 24

Question 25

What is the range of values of YED for which it is income elastic?

Answer 25

YED>1

Question 26

What is the range of values of YED for which it is income inelastic?

Answer 26

YED<1

Question 27

What is the value of YED for which it is perfectly inelastic?

Answer 27

YED=0

Question 28

Is XED positive or negative for substitute goods

Answer 28

Positive

Question 29

Is XED positive or negative for complementary goods?

Answer 29

Negative

Question 30

What is price elasticity of supply?

Answer 30

A measure of the extent to which the quantity supplied of a product changes in response to a change in the price of the product.

Question 31

What is the formula for price elasticity of supply (PES)?

Answer 31

Question 32

What is the range of values for which PES is elastic?

Answer 32

PES>1

Question 33

What is the range of values for which PES is inelastic?

Answer 33

0

Question 34

What is the unitary value of PES?

Answer 34

1

Question 35

Graph for inelastic/elastic/unitary supply.

Answer 35

Question 36

What are the factors affecting PES?

Answer 36

-Long/short run (inelastic in short run and elastic in long run) -Supply more elastic in periods of unemployment (easy to attract workers) -Stock levels of firms (high stock=elastic) -Mobility of factors of production and nature of product.

Question 37

Definition of consumer surplus.

Answer 37

The difference between the price a consumer has to pay for a product (usually the market price) and the price the consumer would be willing to pay for a product.

Question 38

Definition of producer surplus.

Answer 38

The difference between the price a firm actually receives for a product (usually the market price) and the price they would be willing and able to supply the product for.

Question 39

Producer and consumer surpluses on a graph.

Answer 39

Question 40

What is the deadweight loss?

Answer 40

The value of producer and consumer surplus that is lost when resources are not allocated efficiently, for example, when a market is not in equilibrium.