3 - Price Determination Definitions

Question 1

Effective Demand

Answer 1

Demand for a product which can be supported monetarily.

Question 2

Market Demand

Answer 2

The total number of consumers who are willing and able to purchase a good or service at a given price.

Question 3

Individual Demand

Answer 3

The demand for a good or service by a household or individuals.

Question 4

Condition of Demand

Answer 4

At a higher price, demand for a product will contract, as well as other factors - weather, trends.

Question 5

Substitute Goods

Answer 5

A product or service that consumers see as a good enough alternative to another product.

Question 6

Complementary Goods

Answer 6

Products which are bought and used together.

Question 7

Increase in Demand

Answer 7

Demand for a product increases, because of a change in another.

Question 8

Decrease in Demand

Answer 8

Less of a product is purchased.

Question 9

Normal Good

Answer 9

An increase in demand of certain goods because of higher living standards.

Question 10

Inferior Good

Answer 10

A decrease in demand of certain goods because of an increase in living standards.

Question 11

Market Supply

Answer 11

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

Question 12

Profit

Answer 12

The difference between total sales, revenue, and total costs of production.

Question 13

Condition of Supply

Answer 13

A determinant of supply, other than price, which causes a shift in the supply curve.

Question 14

Market Equilibrium

Answer 14

The state in which supply and demand balance out, and prices become stable as a result.

Question 15

Market Disequilibrium

Answer 15

Quantity supplied isn’t equal to quantity demanded. As a result, price is above equilibrium.

Question 16

Excess Supply

Answer 16

The quantity being offered exceeds quantity demanded, at the current price.

Question 17

Excess Demand

Answer 17

Demand exceeds supply at a given price.

Question 18

Joint Supply

Answer 18

Production of one good leads to the supply of another.

Question 19

Composite Demand

Answer 19

Where goods have more than one use.

Question 20

Derived Demand

Answer 20

The demand for a good or service that results from the demand for a different good or service.

Question 21

Rationing Function

Answer 21

As prices rise, excess demand is removed, so only consumers who have the ability to pay can purchase a good.

Question 22

Signalling Function

Answer 22

Prices provide important market signals to producers, to increase or decrease production.

Question 23

Incentive Function

Answer 23

Increased prices strengthen incentives to firms, to produce more, in order to make a profit.

Question 24

Allocative Function

Answer 24

Diverts resources to where they can maximise returns, and away from uses where they don’t.

Question 25

Elasticity

Answer 25

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

Question 26

Price Elasticity of Demand

Answer 26

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

Question 27

Income Elasticity of Demand

Answer 27

Measures the extent to which demand for a good changes in response to a change in income.

Question 28

Income Elastic Demand

Answer 28

When a change in income leads to a change in demand by a similar amount.

Question 29

Income Inelastic Demand

Answer 29

When a change in income doesn’t change quantity demanded by the same amount.

Question 30

Negative Income Elasticity

Answer 30

When demand for a product decreases, as consumer income increases.

Question 31

Luxury Goods

Answer 31

A good for which demand increases as income increases, so a higher proportion of income is spent on it.

Question 32

Necessities

Answer 32

Things which are still purchased, when incomes are low, so proportion of income spent on these doesn’t increase, as income increase.

Question 33

Inferior Goods

Answer 33

A good for which demand drops, as income rises.

Question 34

Normal Goods

Answer 34

Goods for which demand increases, as incomes increase.

Question 35

Cross Elasticity of Demand

Answer 35

The extent to which demand for a good changes in response to a change in price of another good.

Question 36

Price Elasticity of Supply

Answer 36

The extent to which supply of a good changes in response to a change in price of that good.