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Economics > topic 3 : price determination in a competitive market > Flashcards

topic 3 : price determination in a competitive market Flashcards

1
Q

what does the demand curve illustrate

A

the relationship between quantity demanded and price

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2
Q

what are the two main theories that explain the relationship between price and quantity

A
  • income effect- when prices fall consumers can afford a greater quantity of good and services so the demand foe these increase
  • substitution effect- when the price of one good falls consumers will buy more of the cheaper good so demand foe the cheaper good increases and the demand for the costlier good decreases
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3
Q

what are substitute goods

A

goods that can replace each other because they satisfy the same need. If the price of one increases, demand for the other rises.

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4
Q

what are complement goods

A

goods that are used together, so demand for one increases the demand for the other.

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5
Q

what is price and quantity demanded

A

-price is what the buyer pays for a specific good or service
-quantity demanded is the total number of units purchased at that price

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6
Q

What does the demand curve show and look like?

A

The demand curve is downward sloping, and shows the relationship between price and quantity

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7
Q

what does the law of demand show?

A

The inverse relationship between price and quantity, assuming all of the variables are constant

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8
Q

factors that shift the demand curve

A
  • population
    -income
    -related goods
    -advertising
    -tastes and fashions
    -expectations
    -seasons
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9
Q

what does the law of diminishing marginal utility state?

A

As an extra unit of good is consumed, the marginal utility falls, therefore consumers are willing to pay less for the good

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10
Q

what is the price elasticity of demand?

A

The price elasticity of demand is the responsiveness of a change in demand to a change in price

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11
Q

What is the formula for PED?

A

Price elasticity = %change in quantity demanded/ % change in price

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12
Q

what is the PED for a price elastic good

A

PED is > 1

(very responsive to change in price)

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13
Q

What is the PED of a price inelastic good?

A

PED is <1

(relatively unresponsive to a change in price)

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14
Q

What is the PED of a unitary elastic good?

A

PED = 1

(demand is equal to change in price)

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15
Q

what is the PED of a perfectly inelastic good

A

PED=0

(Demand does not change when price changes )

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16
Q

what is the PED of a perfectly elastic good?

A

PED = infinity

(Demand forced to zero when price changes )

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17
Q

factors influencing PED

A

-necessity
-substitutes
-addictiveness or habitual consumption
-proportion of income spent on good
- durability of the good
- peak and off peak demans

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18
Q

total revenue equals

A

price x quantity sold

19
Q

what is income elasticity of demand (YED)

A

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

20
Q

what is the formula for YED

A

income elasticity of demand = %change in quantity demanded/ % change in income

21
Q

what are inferior goods YED

A

YED< 0

see a fall in demand as income increases

22
Q

what are normal goods YED

A

YED > 0

demand increases as income increases

23
Q

what are luxury goods YED

A

YED> 1

increase in income causes an even bigger increase in demand

24
Q

what is cross elasticity of demand (XED)

A

the responsiveness of a change in demand of one good X, to a change in price of another good Y

25
Q

formula for XED

A

cross price elasticity of demand = % change in quantity demanded of good A / % change in price of good B

26
Q

what XED do complementary goods have (weak and close complements)

A

-negative XED
because if one good becomes more expensive the quantity demanded for both goods will fall

-close complements: a small fall in the price of good X leads to large increase in quantity demanded of Y
-weak complements: a large fall in the price of good X leads to only a small increase in quantity demanded of Y

27
Q

what is XED of substitutes (close and weak substitutes)

A

-positive XED

-close substitutes- a small increase in the price of a good X leads to a large increase quantity demanded in Y
-weak substitutes- a large increase in the price of good X leads to a smaller increase in quantity demanded of Y

28
Q

is the demand curve downward sloping or upward sloping for substitutes

A

upward sloping

29
Q

is the demand curve downward sloping or upward sloping for complements

A

downwards sloping

30
Q

what XED do unrelated goods have

A

zero

31
Q

why are firms interested in XED

A

to see how many competitors they have and how likely they are going to be effected by prices changes by other firms selling substitutes or complementary goods

32
Q

what is supply

A

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

33
Q

why is the supply curve upwards sloping

A
  • if price increases it is more profitable so supply increases
  • higher prices encourage new firms to enter the market because its more profitable so supply increases
  • with larger output firms costs increase so they need to charge a higher price to cover the costs
34
Q

factors that shift the supply curve

A

-productivity
-indirect taxes
-number of firms
-technology
-subsidies
-weather
costs of production

35
Q

what is the price elasticity of supply

A

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

36
Q

PES formula

A

price elasticity of supply = %change in quantity supplied/ % change in price

37
Q

PES for elastic supply

A

PES is > 1

38
Q

PES of inelastic supply

A

PES is < 1

39
Q

perfectly elastic PES

A

PES = 0

40
Q

perfectly elastic supply

A

PES= infinity

41
Q

factors influencing PES

A

-time scale
- spare capacity
- level of stocks
- how substitutable factors are
- barriers to entry to the market

42
Q

aasumptions of the equilibrium model

A

perfect competition
ceteris paribus
independence between supply and demand

43
Q

types of demand

A

derived- demand for one good is linked to demand for related good
composite- good demanded has more than one use
joint - bought togetehr

Economics (3 decks)

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