1.2 Price determination in a competitive market

Question 1

Market

Answer 1

A place that brings buyers and sellers together

Question 2

Commodity markets

Answer 2

Worldwide trade of raw materials

Question 3

Financial markets

Answer 3

Stocks, shares, currencies

Question 4

Demand

Answer 4

How many buyers are willing and able to pay

Question 5

Law of demand

Answer 5

Demand rises as price falls

Question 6

Income effect

Answer 6

If income is fixed, then when price falls, real incomes and demand will rise

Question 7

Substitution effect

Answer 7

If the price of a good rises, the demand for its subs will increase

Question 8

Supply

Answer 8

The quantity offered for sale at a given price

Question 9

Surplus

Answer 9

Price is too high so demand is low

Question 10

Shortage

Answer 10

Price is too low so demand is high

Question 11

PASIFIC

Answer 11

Population
Advertising
Substitutes
Income
Fashion
Interest rates
Complements

Question 12

PINTS WC

Answer 12

Productivity
Indirect tax
Number of firms
Technology (=better productivity)
Subsidies
Weather
Cost of production

Question 13

PED

Answer 13

Proportional responsiveness of demand to a change in price
>1 is elastic
1 is unit elastic
<1 is inelastic

Question 14

Velbem goods

Answer 14

Demand increases when price increases

Question 15

Factors of PED

Answer 15

Strength/number of subs
Luxury or necessity
Addictive
Income percent
Length of time of consideration

Question 16

PES

Answer 16

Proportional responsiveness of supply to a change in price
>1 is elastic
=1 is unit elastic
<1 is inelastic

Question 17

Factors of PES

Answer 17

Length of production time
Spare capacity
Stock level
Substitutability of FoP
Time period of change to market
Barriers to supply

Question 18

Consumer surplus

Answer 18

Difference between what consumers are prepared to pay and what they actually pay

Question 19

Producer surplus

Answer 19

Difference between what producers are prepared to sell for and what they actually sell for

Question 20

Types of tax

Answer 20

Indirect - On spending (VAT)
Direct - On income (Income tax)

Question 21

Types of indirect

Answer 21

Specific - Set amount per unit
Ad valorem - Percent extra on each unit

Question 22

Reasons for subsidy

Answer 22

To lower price
To increase supply
Protect jobs
Reduce unemployment

Question 23

Joint demand

Answer 23

When goods are demanded together (complements)

Question 24

Composite demand

Answer 24

Demand for a good that has multiple uses

Question 25

Joint supply

Answer 25

When production of one results in production of another

Question 26

Derived demand

Answer 26

Increased demand means increased need for land/labour

Question 27

XED

Answer 27

Proportional responsiveness of demand of a good to a change in price of a different good
Positive=Subs
Negative=Complements

Question 28

YED

Answer 28

Proportional responsiveness of demand to a change in incomes
>1 is luxury good
Between 0&1 is normal good
Negative is inferior good

Question 29

Max price

Answer 29

To keep affordable

Question 30

Min price

Answer 30

To reduce consumption

Question 31

Invisible hand

Answer 31

Individuals working in their own interest will create an optimal market
Adam Smith 1776

Question 32

Consumer sovereignty

Answer 32

Consumer preference decides what is produced

Question 33

Allocative efficiency

Answer 33

Demand=Supply

Question 34

Productive efficiency

Answer 34

Every resource used to its full potential
(average cost minimised)

Question 35

Dynamic efficiency

Answer 35

Small, consistent improvements to efficiency over time