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Economics > Section 2: Competitive Markets > Flashcards

Section 2: Competitive Markets Flashcards

1
Q

What is the price sold for a product decided by

A

The demand and supply in the market

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2
Q

What is demand

A

Demand is the quantity of a good/service that consumers are willing and able to buy at a given price, at a particular time

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3
Q

What are normal goods

A

Goods where the demand increases when the real income of the consumer increases

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3
Q

What is the x and y axis in a demand curve

A

x = quantity
y = price

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4
Q

What are inferior goods

A

Goods where the demand decreases when the real income of the consumer increases

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5
Q

What would happen to the demand curve of luxury items if there was a more equal distribution of income

A

Shift to the left (decrease in demand) because there would be less rich people to buy luxury items

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6
Q

What are substitute goods

A

Goods that are alternatives to each other

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7
Q

What do interrelated markets mean

A

Changes to one market affect another one

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8
Q

What is derived demand

A

Demand for a good or a factor in production used in making another good or service

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8
Q

What are complementary goods

A

Goods that are used together - in joint demand

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8
Q

What is composite demand

A

When a good is used for more than one purpose

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9
Q

What is the formula for PED

A

PED = Percentage Change in Quantity Demanded / Percentage Change in Price

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10
Q

When referring to changes in the amount of demand what terms are you supposed to use

A

Contraction
Expansion

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11
Q

What is the price elasticity of demand

A

It is a measure of how the quantity demanded of a good responds to a change in price

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12
Q

What are the three types of PED

A

Elastic
Inelastic
Unit Elastic

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13
Q

What is Elastic demand

A

When the PED is greater than one

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14
Q

What is Perfect Elastic Demand

A

When the PED is +/- infinity
This means that any price increases will take the demand to 0

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14
Q

Describe the relationship between price and quantity demanded when the demand is elastic

A

The price change will have a larger effect on quantity demanded

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15
Q

What is Inelastic Demand

A

When the PED is greater than 0 but less than 1

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16
Q

Describe the relationship between price and quantity demanded when the demand is inelastic

A

The price change will have a smaller effect on quantity demanded

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17
Q

What is Perfect Inelastic Demand

A

Has a PED of 0 and any change in price will have no effect on on the quantity demanded

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18
Q

What is Unit Elasticity of Demand

A

When the PED = +/-1

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19
Q

Describe the relationship between price and quantity demanded when the demand when the good has unit elasticity

A

When the percentage change in price is equal to the percentage change in quantity demanded

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20
Q

What is Income Elasticity of Demand

A

It measures how much the demand for a good changes with a change in real income

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21
Q

What is Income Elastic

A

YED > 1

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22
Q

What is the formula for YED

A

YED = Percentage Change in Quantity Demanded of a Good / Percentage Change in Real Income

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23
Q

What is Income Inelastic

A

YED < 1

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24
Q

What is Perfectly Inelastic Income

A

YED = 0

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25
Q

What is Cross Elasticity of Demand

A

A measure of how the quantity demanded of one good responds to a change in price of another good

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26
Q

What is the formula for XED

A

XED = Price Change in Quantity Demanded of Good A / Percentage Change in Price of Good B

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27
Q

What will the XED be if the goods are complementary and substitutes

A

Complementary = Negative XED
Substitutes = Positive XED

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28
Q

How does substitutes affects PED

A

The more substitutes a good has the more price elastic the demand is - that’s because the consumers can easily switch to something else if the price rises

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29
Q

Explain how type of good affects PED

A

Demand for essential items is price inelastic (non-essential is price elastic)
Demand for habit-forming goods tends to be price inelastic
Demand for purchases that cannot be postponed tends to be price inelastic
Demand for products with several different uses tends to be price inelastic

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30
Q

How does the percentage of income spent on good affect the PED

A

Demand for goods that require a large percentage of income is more price elastic than products that take a smaller percentage
Consumers are more likely to shop around for the best price for an expensive good

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31
Q

How does time affect PED

A

In the long run demand becomes more price elastic as it becomes easier to change to alternatives because consumers have had more time to shop around
Habits and loyalties may change

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32
Q

Equation for total revenue

A

Price per Unit x Quantity Sold

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33
Q

Explain how the PED changes along the demand curve

A

Minus infinity at high price/zero demand
To an elasticity of -1 at the midpoint
To an elasticity of zero at zero price/high quantity

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34
Q

When is total revenue is maximised in relation to PED

A

When the PED = +/-1

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35
Q

If a good has elastic demand what will a reduction in price do to the total revenue

A

Increased firms total revenue

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36
Q

What is the YED of a luxury item

A

YED > 1

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36
Q

Explain the difference in YED in normal and inferior goods

A

Normal - Positive YED (0 < YED <1)
As income increases quantity demand increases
Inferior - Negative YED (YED < 0)
As income rises, quantity demand falls
A rise in income will lead to good being replaced

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37
Q

If a good has inelastic demand what will a reduction in price do to the total revenue

A

Decreased firms total revenue

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38
Q

What is the XED of complements

A

Negative XED
Increase in price of a good it will decrease the demand of it’s complements

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39
Q

What is the XED of substitutes

A

Positive XED
A fall in price of a good will decreases the demand of the substitute
The closer the substitutes the more positive the XED

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40
Q

What does it mean if a good has a negative XED

A

It is independent

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41
Q

What is supply

A

The quantity of a good or service that producers supply to the market at a given price, at a particular time

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42
Q

What is the x and y axis of a supply curve

A

x = Quantity of Supply
y = Price

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43
Q

What terms should be used when describing increase or decrease in supply

A

Contraction and Extension

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44
Q

Explain the supply curve

A

Higher the price of product means higher product which means higher incentive to increase production

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45
Q

What are marginal firms

A

Firms that are just breaking even

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46
Q

What are the factors that can cause a shift in the supply curve

A

Changes to the costs of production
Improvements in technology
Changes to the productivity of factors of production
Indirect taxes and subsidies
Changes to the price of other goods
Number of suppliers

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47
Q

What are the factors that can cause a shift in the supply curve

A

Changes to the costs of production
Improvements in technology
Changes to the productivity of factors of production
Indirect taxes and subsidies
Changes to the price of other goods
Number of suppliers

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48
Q

Explain how the improvements in technology can cause a shift in the supply curve

A

Can increase supply because it will decrease the costs of production

49
Q

Explain how the changes to the costs of production can cause a shift in the supply curve

A

Increase in costs of production (raw materials, wages etc.) will decrease profits and decrease supply (curve shifts to the left)

50
Q

Explain how knowledge of elasticities of demand is useful to firms

A

Can be used for sales forecasting - YED of product and changes in income are known then sales levels can be predicted
YED can be used in pricing policy (reduction in price of a normal good in an expected fall in incomes will limit the reduction in demand)
May choose to supply products that have a range in YED so they can still earn revenue whether the economy is in recession or boom
XED can tell them how to react to changes in the price of related products to ensure maximise demand for their products

51
Q

Explain how knowledge of elasticities of demand is useful to governments

A

Need to know demand for goods during booms or recession when they’re setting their policies

52
Q

Explain how changes to the productivity of factors of production can cause a shift in the supply curve

A

Increase output

53
Q

Explain how indirect taxes and subsidies can cause a shift in the supply curve

A

Tax on good increases costs for a producer - supply is reduced and the supply curve shifts to the left
A subsidy reduces costs for a producer - this does the opposite of a tax

54
Q

Explain how changes to the price of other goods can cause a shift in the supply curve

A

A firm may increase production to a good where the price increases to increase profit

55
Q

Explain how number of suppliers can cause a shift in the supply curve

A

Increase in suppliers will increase supply

55
Q

What is Price Elasticity of Supply

A

A measure of how the quantity supplied of a good responds to a change in its price

56
Q

What is the formula for PES

A

PES = Percentage Change in Quantity Supplied/Percentage Change in Price

57
Q

Is PES generally positive or negative and why

A

Positive - generally the higher the price the greater the supply

58
Q

What are the three types of PES

A

Elastic
Inelastic
Unit Elastic

59
Q

What values of PES is elastic

A

PES > 1

60
Q

What values of PES is Inelastic

A

0 < PES < 1

60
Q

What values of PES is Unit Elastic

A

PES = 1

61
Q

Describe the relationship between price and quantity supplied when the supply is elastic

A

This means that price will have a larger effect on quantity supplied

62
Q

Describe the relationship between price and quantity supplied when the supply is inelastic

A

This means that price will have a lower effect on quantity supplied

63
Q

Describe the relationship between price and quantity supplied when the supply is unit elastic

A

This means that the percentage change in price is equal to the percentage change in quantity supplied

64
Q

What does Perfect Elasticit Supply mean

A

Any fall in price means the quantity supplied would fall to zero

65
Q

What values does Perfect Elastic Supply have

A

PES of +/- infinity

66
Q

What values does Perfect Inelastic Supply have

A

PES of 0

67
Q

What does Perfect Inelastic Supply mean

A

Any change in price will have no effect on the quantity supplied

68
Q

Which PES is optimal to firms

A

They aim to have a high PES
They aim to respond quickly to changes in price and demand so they need to make their supply as elastic as possible

69
Q

How can a firm have a high PES

A

Flexible working patterns
Latest tech
Spare production capacity

70
Q

In the short term is price Elastic, Inelastic or Unit Elastic

A

Inelastic
Over short periods of time a firm may find it difficult to switch production from one good to another
The firms capacity is also fixed

71
Q

Which factor of production in the short run is fixed

A

Capital - a firm can recruit more employees and buy more materials but it takes time to build additional facilities

72
Q

In the long term is price Elastic, Inelastic or Unit Elastic

A

Elastic (generally)
In the long run all the factors of production are variable so a firm is able to increase its capacity
Firms have longer to react to changes in price and demand

73
Q

What factors affect PES

A

Periods of unemployment supply tends to be elastic - more workers for firms
Perishable goods - inelastic supply as they can’t be stored for long
Firms with high stock levels have elastic supply - can increase supply quickly
Industries with more mobile factors of production have more elastic supply

74
Q

What is market equilibrium

A

When supply meets demand and price and output is stable

75
Q

What are market forces

A

The free interaction between supply and demand

76
Q

On a graph where can market equilibrium be found

A

When the supply curve and the demand curve intersects

77
Q

How would you describe the market when supply and demand don’t meet

A

Market disequilibrium

78
Q

What is excess supply

A

Quantity supplied to a market is greater than the quantity demanded

79
Q

What is excess demand

A

Demand for a good is greater than the supply

80
Q

Why does excess supply or demand not exist for long in a free market

A

Market forces act to remove excess supply or demand

81
Q

What happens if there is a shift in demand or supply curves

A

The market equilibrium will change

82
Q

Explain how elasticity affects the point of new equilibrium if the supply or demand curve shifts

A

If price is elastic shifts in demand/supply will have a greater impact on price rather than quantity
If price is inelastic shifts in demand/supply will have a greater impact on quantity rather than price

83
Q

What are the conditions to a competitive market

A

Large number of sellers and buyers
No single consumer or producer can influence the allocation or the price that goods can be bought at

84
Q

What is the price mechanism

A

Changes in supply and demand in goods leads to changes in its price and to the quantity bought or sold

85
Q

In a competitive market what is the assumption that are made about consumers and producers

A

Assumed to act rationally

86
Q

What is the invisible hand of the market

A

The price mechanism allocates goods and services in an impersonal way

87
Q

What are the three functions of the price mechanism

A

Acts as an incentive to firms - higher price allows firms to make more goods
Acts as signalling device - changes in price show changes in supply and demand and act as a signal to producers and consumers
Acts to ration scarce resources - if there is high demand for a good but it has low supply then the price will be high

88
Q

What are the advantages to the price mechanism

A

Resources are allocated effectively to satisfy consumers’ wants and needs
Price mechanism can operate without the cost of employing people to regulate it
Consumers decide what is and isn’t produced by producers
Price are kept to their minimum as resources are used as efficiently as possible

89
Q

What are the disadvantages to the price mechanism

A

Inequality in wealth and income is likely
Under provision in merit goods
People with limited skills or ability to work will suffer unemployment or receive very low wages
Public goods won’t be produced

90
Q

Give an example of how the price mechanism can have unintended consequences

A

Offering payments to blood donors may reduce amount of blood donors because some of them will be disturbed by receiving payments for donating blood

91
Q

What is a consumer surplus

A

When a consumer pays for a product less than what they were prepared to pay for

92
Q

What is a producer surplus

A

When a producer sells a product at a price below the equilibrium price

93
Q

Where is the producer and consumer surplus on a price and quantity graph in relation to the supply and demand curves

A

Consumer surplus - the area below the demand curve and above the equilibrium line
Producer surplus - the area above the supply curve and below the equilibrium price line

94
Q

What is a subsidy

A

When a government pays a producer to lower the price of a good to increase its demand

95
Q

What are indirect taxes

A

When a government places a tax on a good to increase the price of a product to decrease the demand

96
Q

What does a subsidy do the demand curve

A

Shift it to the right

97
Q

Describe the relationship between the PES of a product and the amount of consumer and producer gain when subsidies are granted

A

The more price inelastic the demand curve is, the greater the consumer’s gain is from the subsidy
The more price elastic, the greater the producer’s gain is from the subsidy

98
Q

What does taxation of a good to the supply curve

A

Shift to the left

99
Q

Describe the relationship between the PES of a product and the amount of consumer and producer burden when taxation happens

A

The more price inelastic the demand curve is, the greater the tax burden for the consumer
The more price elastic, the greater the tax burden for the producer

100
Q

What resource is very important in transportation

A

Many goods are made from or stored in plastic - those goods are also transported in modes of transportation that consumes oil

101
Q

What can an increase in the price of oil do to the economy of a country

A

Can cause inflation - this is because it will increase the price of the majority of goods because oil is essential to the majority of items

102
Q

Describe the fluctuation of oil prices

A

Fluctuate widely with increases and decreases rapidly over time

103
Q

Describe the elasticity of the demand for oil

A

The demand for oil is price inelastic because oil is so important and increase in price doesn’t affect demand

104
Q

Describe the elasticity of the supply of oil

A

The supply of oil is price inelastic because it is difficult to increase the supply of oil in the short term - exploration of new oil takes time

105
Q

What happens to the demand for oil when there is an economic boom and recession

A

Falls during recession and increases during boom because oil is used in most economic activity

106
Q

Explain how the US dollar can affect the demand for oil

A

Oil is priced in US dollars so if the value of the dollar is low then more oil can be purchased by speculators holding other currencies

107
Q

What happens to the demand for oil if the demand for products made from crude oil increases and explain this type of demand

A

Increases the demand for oil
This type of demand is derived demand

108
Q

As living standards improve what happens to the demand for oil

A

Increases - can be linked to an increase in the consumption of goods and services

109
Q

Name an organisation that has significant control over the price of oil

A

The Organisation of Petroleum Exporting Countries (OPEC)
Members include large oil exporting countries such as Saudi Arabia and Venezuela
They can agree to cut or increase oil production which therefore affects the price

110
Q

What factors can affect the supply of oil in the long run (in relation to the actual of process of extraction)

A

Size of remaining oil reserves
Cost of extracting oil
The efficiency and cost of technology needed to extract

111
Q

Why might oil reserves restrict the supply of oil

A

To keep the price high

112
Q

What would happen to the price of houses if the supply of houses increased

A

The price would decrease

113
Q

Explain the factors that affects the demand of housing

A

State of the economy has a big impact - high unemployment leads to lower prices and lower demand and the opposite is true for low employment
High living standards increase demand for housing
Fall in the cost of renting may decrease demand to buy
If interests rates rise for mortgages then the demand for house purchases will decrease

114
Q

What is a substitute for buying a house

A

renting one

115
Q

Explain the price elasticity of housing

A

In the short term PED of housing is inelastic because there is no substitute for housing

116
Q

Explain the price elasticity of supply of housing

A

Inelastic because the supply can’t be increased quickly because the production of houses takes time
Supply can also be affected by availability of materials and workers, suitable land and restrictive government regulations

117
Q

Explain the knock on effects of house prices

A

If house prices rise and there’s and increase in demand for houses this can create job opportunities for construction workers
Higher house prices increase the value of peoples assets and can increase consumer confidence
Increased house sales encourage spending on furniture and other goods

118
Q

Describe the type of demand for transport

A

Derived demand
Always results for demand for other goods and services :
- People want to get to places for work, leisure and
holidays
- Firms want to bring factors of production together

119
Q

Describe the income and price elasticity of transport

A

Positive income elasticity of demand because it is a normal good
Demand is price elastic to some extent - people might cut back on leisure travel if prices rise

120
Q

Describe the YED for bus, car and air travel

A

Car and air travel are generally considered to have a positive YED but bus travel has negative YED

121
Q

What is the price elasticity of car travel

A

Quite low - people value the convenience and comfort of driving and the substitutes are considered poor in comparison

122
Q

What does the demand for car travel depend on

A

Cost of journey - petrol
Income - car ownership and usage rise with real income
Substitutes - increase in car price could lead to a switch in the mode of transport but the substitutes are considered poor substitutes
Complements - the price of car insurance or parking can have an effect on car demand

123
Q

What is the XED of cars

A

Low because the major drop in quality in cars and trains or buses

Economics (5 decks)

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