3. Price determination in a competitive market

Question 1

What is a market?

Answer 1

A voluntary meeting of buyers and sellers with exchange taking place

Question 2

What is demand?

Answer 2

The quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time

Question 3

What is supply?

Answer 3

The quantity of a good or service that producers are willing and able to sell at given prices in a given period of time

Question 4

What are competitive markets?

Answer 4

Markets in which large number of buyers and sellers possess good market information and can easily enter or leave the market

Question 5

What is a ruling market price (equilibrium price)?

Answer 5

The price at which planned demand equals planned supply

Question 6

What is effective demand?

Answer 6

The desire for a good or service backed by an ability to pay

Question 7

What is market demand?

Answer 7

The quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices

Question 8

What is individual demand?

Answer 8

The quantity of a good or service that a particular consumer or individual is willing and able to buy at different market prices

Question 9

What is condition of demand?

Answer 9

A determinant of demand, other than the good’s own price, that fixes the position of the demand curve

Question 10

What are substitute goods?

Answer 10

Alternative goods that could be used for the same purpose

Question 11

What are complementary goods?

Answer 11

When two goods are complements, they experience joint demand

Question 12

What does ‘increase in demand” mean?

Answer 12

There is a rightward shift of the demand curve

Question 13

What does ‘decrease in demand” mean?

Answer 13

There is a leftward shift of the demand curve

Question 14

What is a normal good?

Answer 14

A good for which demand increases as income rises and demand decreases as income falls

Question 15

What is an inferior good?

Answer 15

A good for which demand decreases as income rises and demand increases as income falls

Question 16

What is elasticity?

Answer 16

The proportionate responsiveness of a second variable to an initial change in the first variable

Question 17

What is price elasticity of demand?

Answer 17

Measures the extent to which the demand for a good changes in response to a change in the price of that good

Question 18

What are the factors determining price elasticity of demand?

Answer 18

Substitutability, percentage of income, necessities or luxuries, the ‘width’ of the market definition and time

Question 19

What is short run?

Answer 19

The time period in which at least one factor of production is fixed and cannot be varied

Question 20

What is long run?

Answer 20

The time period in which no factors of production are fixed and in which all the factors of production can be varied

Question 21

What is income elasticity of demand?

Answer 21

Measures the extent to which the demand for a good changes in response to a change in income; it is calculated by dividing the percentage change in quantity demanded by the percentage change in income

Question 22

What is cross-elasticity of demand?

Answer 22

Measures the extent to which the demand for a good changes in response to a change in the price of another good; it is calculated by dividing the percentage change in quantity demanded by the percentage change in the price of another good

Question 23

What are the three important demand elasticities?

Answer 23

Price, income and cross-elasticity of demand

Question 24

What is market supply?

Answer 24

The quantity of a good or service that all the firms in a market plan to sell at given prices in a given period of time

Question 25

What is profit?

Answer 25

The difference between total sales revenue and total cost of production

Question 26

What is total revenue?

Answer 26

All the money received by a firm from selling its total output

Question 27

What is condition of supply?

Answer 27

A determinant of supply, other than the good’s own price, that fixes the position of the supply curve

Question 28

What is increase in supply?

Answer 28

A rightward shift of the supply curve

Question 29

What is decrease in supply?

Answer 29

A leftward shift of the supply curve

Question 30

What are the main conditions of supply?

Answer 30

• Costs of production, including wage costs, raw material costs, energy costs, costs of borrowing
• Technical progress
• Taxes imposed on firms, such as VAT, excise duties and the business rate
• Subsidies granted by the government to firms

Question 31

What does a market supply curve show?

Answer 31

How much of a good all firms in the market intend to supply at different prices

Question 32

Where do supply curves slope and why?

Answer 32

Usually upwards because higher prices lead to higher profits, encouraging existing firms to produce more and attracting new firms into the market

Question 33

What makes the supply curve shift to a new position?

Answer 33

If any of the conditions of supply change

Question 34

What is price elasticity of supply?

Answer 34

Measures the extent to which the supply of a good changes in response to a change in the price of that good

Question 35

What is a equilibrium?

Answer 35

A state of rest or balance between opposing forces

Question 36

What is disequilibrium?

Answer 36

A situation in which opposing forces are out of balance

Question 37

What is market equilibrium?

Answer 37

A market is in equilibrium when planned demand equals planned supply, where the demand curve crosses the supply curve

Question 38

What is market disequilibrium?

Answer 38

Exists at any price other than the equilibrium price, when either planned demand < planned supply or planned demand > planned supply

Question 39

What is excess supply?

Answer 39

When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price

Question 40

What is excess demand?

Answer 40

When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price

Question 41

In a competitive market, what do changes in the market price affect?

Answer 41

It eliminates excess demand or excess supply; this is how the price mechanism helps to allocate scarce resources

Question 42

What is joint supply?

Answer 42

When one good is produced, another good is also produced from the same raw materials, perhaps as a by-product

Question 43

What is composite demand?

Answer 43

Demand for a good which has more than one use, which means that an increase in demand for one use of the good reduces the supply of the good for an alternative use. It is related to the concept of competing supply

Question 44

What is derived demand?

Answer 44

Demand for a good or factor of production, wanted not for its own sake, but as a consequence of the demand for something else

Question 45

What upward-sloping straight-line (linear) supply curves display price elasticities?

Answer 45

• If the supply curve intersects the price axis, the curve is elastic at all points, though elasticity falls towards unity as you move from point to point up the curve
• If the supply curve intersects the quantity axis, the curve is inelastic at all Points, though elasticity rises towards unity as you move from point to
  point up the curve
• If the supply curve passes through the origin, elasticity equals unity (+1) at all points on the curve