Price determination in a competitive market

Question 1

Define market
When do competitive markets occur?

Answer 1

Market- a voluntary meeting of buyers and sellers with exchange taking place
A competitive market occurs when there are a large number of buyers and sellers all passively accepting the ruling market price which is set by the interaction of those taking part in the market

Question 2

What do highly competitive markets not have? what is the significance?

Answer 2

They lack barriers to enter and exit. New buyers and sellers can enter and exit the market easily. there is also a high level of information, people can find out what others are doing easily.

Question 3

Define
- demand/ effective demand
- supply

Answer 3

Demand- the quantity of goods and services that consumers are willing ad able to buy at given prices in a given time period
Effective demand- desire for product is backed up by ability to pay

Supply- the quantity of goods and services that producers are willing and able to sell at given prices in a given period of time

Question 4

What is the shape of the demand and supply curves?
What relationship does it show?

Answer 4

The demand curve is downwards sloping. It shows the relationship between price of good and the quantity demanded

The supply curve is upwards slopping. it shows the relationship between price fo a good and the quantity supplied

Question 5

Difference between market and individual demand

Answer 5

Market demand- quantity of goods or services that all the consumers in a market are willing and able to buy at different market prices
Individual demand- quantity of goods or services that a particular consumer or individual are willing and able to buy at different market prices

Question 6

What are the determinants of demand, other than price?

Answer 6

• prices of substitute goods (goods in competing demand)
• prices of complementary goods ( goods in joint demand)
• personal disposable income
• tastes and preferences
• population size, influences total market size

Question 7

What would cause a outwards shift of Demand?

Answer 7

• increase in prices of substitute goods (goods in competing demand)
• fall in prices of complementary goods ( goods in joint demand)
• increase personal disposable income
• successful advertising, making people think more favourable about the good
• increase in population size

Question 8

What is a
- normal good
- inferior good

Answer 8

Normal good - a good for which the demand rises when incomes rise. Has a positive income elasticity YED>0
Can be a luxury good- an increase in income leads to a larger increase in demand YED>1
Inferior good- demand for the good falls when incomes rise. Has a negative income elasticity YED<0

Question 9

What is meant by elasticity?

Answer 9

The proportionate responsiveness of a second variable to an initial change in the first variable.
Elastic- an increase in price leads to a greater than proportional change in quantity. Very responsive
Inelastic- an increase in price leads to a less than proportional change in quantity. Not responsive

Question 10

What is price elasticity of demand?
What is income elasticity of demand?
What is Cross elasticity of demand?

Answer 10

Price Elasticity of demand- measures the extent to which the demand for a good changes in response to a change in the price of that good

Income elasticity of demand- measures the extent to which the demand for a good changes in response to a change in the income

Cross elasticity of demand- measures the extent to which the demand for a good changes in response to a change in the price of another good

Question 11

What is the formula for
-PED
-YED
-PES
-XED

Answer 11

Price elasticity of demand (PED) = % change in Q.D. / % change in Price
Price elasticity of Income (YED) = % change in Q.D. / % change in Income
Price elasticity of Supply = % change in Q.s. / % change in Price
Cross-elasticity of demand = % change in Q.D. of good A / % change in Price of good B

Question 12

What would a graph for
-perfectly elastic
-perfectly inelastic
look like?

Answer 12

Perfectly elastic- horizontal line
Perfectly inelastic- Vertical line

Question 13

Why is substitutability a determinant of price elasticity of demand?

Answer 13

1. SUBSTITUTABILITY- most important determinant. When a substitute exists, consumer responds to price by switching expenditure away from the good and buys the substitute, demand is very elastic if close substitutes exists

Question 14

Why is percentage of income a determinant of price elasticity of demand?

Answer 14

2. PERCENTAGE OF INCOME- demand curves for goods that are a large proportion of income are more elastic. this is because for items that are small proportions, rarely brought, people hardly notice an increase in price on the item

Question 15

Why is necessities or luxury a determinant of price elasticity of demand?

Answer 15

3. NECCESSITIES OR LUXURY- it is often said luxury goods are elastic and necessary goods are inelastic. However it is mainly the lack of substitutes for necessities that makes them price inelastic.

Question 16

Why is width of the market a determinant of price elasticity of demand?

Answer 16

4. WIDTH OF THE MARKET- the wider the market, the lower the price elasticity

Question 17

Why is time a determinant of price elasticity of demand?

Answer 17

5. TIME- for many goods demand id more elastic in the long run and more inelastic in the short run. In the short run, it takes time to notice and respond to a price change. cannot just quickly switch all the time

Question 18

What is the difference between
-short run
-long run

Answer 18

Short run- the time period in which at least one factor of production is fixed and cannot be varied

Long run- the time period on which no factors of production are fixed and they can all be varied

Question 19

What is market supply?

Answer 19

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

Question 20

Define
-profit
-total revenue

Answer 20

Profit- the difference between total sales revenue and total costs of production

Total revenue- all the money received by a firm from selling its total output

Question 21

What are the determinants of supply?

Answer 21

Costs of production
- wage costs
- raw material costs
- energy costs
- costs of borrowing
Technical progress
Taxes imposed on firms such as VAT
Subsidies granted by the government to firms

Question 22

Factors affecting the Price elasticity of supply

Answer 22

1. Length of production period- supply more elastic for goods that cant be made quickly and agricultural goods
2. Availability of spare capacity- if labour, raw materials and spare capacity are readily available, production can be increase quite quick in the short run
3. Ease fo switching between production methods- supply more elastic if firms can quickly alter the way the produce goods
4. Number of firms in the market- more firms in the market, easier to leave/enter market, more elastic supply
5. Time- more elastic in the long run

Question 23

What is market equilibrium and market disequilibrium?

Answer 23

Market equilibrium- a market is in equilibrium when planned demand = planned supply (prices do not change). At the intersection of demand and supply curves

Marker disequilibrium- exists at any price other than equilibrium price, when
planned demand < planned supply- prices fall
planned demand > planned supply- prices rise

Question 24

Define
-excess supply
-excess demand

Answer 24

Excess supply- when firms wish to sell more than consumers wish to buy, with price above equilibrium price

Excess demand- consumers wis to buy more than firms wish to sell, with he price below equilibrium price

Question 25

What is joint supply?

Answer 25

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

Demand for beef rises, more cows killed, so more leather is available. supply of leather increases

Question 26

What is joint demand?

Answer 26

An increase in the price of one good in joint demand, or a complementary good, has the opposite effect on price of the substitute good

Rise in price of sony consoles, demand for them falls. sony and x-box are competing goods, xbox is a substitute good. the demand for xbox will increase

Question 27

What is composite demand?

Answer 27

An increase in demand for one use of the good reduces the demand for an alternate use.

Wheat used in biofeul, less wheat for eating

Question 28

What is derived demand?

Answer 28

When a good is necessary for production increases when the demand for the product increases

the demand for capital goods increases when the demand for consumer good increases. More consumer goods must be made and so more capital goods such as machinery is needed for the production of them