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Economics From the book > 2 price determination in a competitive market > Flashcards

2 price determination in a competitive market Flashcards

1
Q

competitive market definition

A

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

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2
Q

equilibrium price definition

A

the price at which planned demand for a good or service exactly equals planned supply

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3
Q

supply definition

A

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

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4
Q

demand definition

A

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

  • for economists demand is always effective demand
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5
Q

effective demand definition

A

the desire for a good or service backed by the ability to pay

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6
Q

market demand definition

A

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

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7
Q

condition of demand definition

A

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

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8
Q

increase in demand definition

A

a rightward shift of the demand curve

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9
Q

decreases in demand definition

A

a leftward shift of the demand curve

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10
Q

normal good definition

A

a good for which demand incre4ases as income rises and demand decreases as income falls

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11
Q

inferior good definition

A

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

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12
Q

market definition

A

a voluntary meeting of buyers and sellers to buy and sell goods and services

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13
Q

when do markets become competitive markets

A

when there are a large number of buyers and sellers passively accepting the equilibrium price

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14
Q

why is it easy for new businesses to enter a highly competitive market

A

due to a lack of barriers of entry and exit

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15
Q

what are 3 things within a competitive market

A
  • low barrier to enter
  • low exit barrier
  • transparency (everyone can see what everyone else is doing)
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16
Q

individual demand definition

A

the quantity of a good or service that an individual consumer in a market is willing and able to buy at different market prices

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17
Q

how to work out market demand

A

add up all individual demand within the market

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18
Q

law of demand definition

A

inverse relationship between price and quantity demanded

as a good’s price falls, more is demanded

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19
Q

what is on the x and y axis of a demand curve

A

y axis = price
x axis = quantity demanded

\ because inverse relationship

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20
Q

movement along the demand curve definition

A

takes place when the good’s price changes

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21
Q

extension of demand definition

A

movement down the demand
- price falls
- increases demand

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22
Q

contraction of demand definition

A

movement up the demand curve
- price increases
- decreases demand

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23
Q

ceteris paribus definition

A

assuming that all other variables are unchanged/constant

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24
Q

what are the 6 conditions of demand

A
  • the prices of substitute goods (competing demand)
  • the prices of complementary goods (joint demand)
  • personal income
  • tastes and preferences
  • population size, which influences total market size
  • successful advertising campaign
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25
Q

for a normal good what happens when disposable income increases

A

demand increases
- rightward shift of demand

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26
Q

for a normal good what happens when disposable income decreases

A

demand decreases
- leftward shift of demand

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27
Q

for inferior goods what happens when disposable income increases

A

demand decreases
- leftward shift in demand

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28
Q

for an inferior good what happens when disposable income decreases

A

demand increases
- rightward shift in demand

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29
Q

elasticity definition

A

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

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30
Q

price elasticity of demand definition

A

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

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31
Q

what are the 5 factors determining price elasticity of demand

A
  • substitutability
  • percentage of income
  • necessities or luxuries
  • width of the market
  • time
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32
Q

income elasticity of demand definition

A

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

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33
Q

cross-elasticity of demand definition

A

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

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34
Q

market supply definition

A

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

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35
Q

profit definition

A

the difference between total sales revenue and total costs of production

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36
Q

total revenue definition

A

the money a firm receives when selling its output, calculated by multiplying price by quantity sold

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37
Q

conditions of supply definition

A

determinants of supply, other than good’s own price, that fix the position of the supply curve

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38
Q

increase in supply definition

A

a rightward shift of the supply curve

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39
Q

decreases in supply definition

A

a leftward shift of the supply curve

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40
Q

price elasticity of supply

A

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

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41
Q

3 demand elasticities

A
  • price elasticity of demand
  • income elasticity of demand
  • cross-elasticity of demad
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42
Q

price elasticity demand formula

A

percentage change in quantity demanded / percentage change in price

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43
Q

income elasticity of demand formula

A

percentage change in quantity demanded / percentage change in income

44
Q

cross-elasticity demand formula

A

percentage change in quantity of good A demand / percentage change in price of good B

45
Q

5 demand curves need to know

A
  • perfectly elastic demand
  • elastic demand
  • unit elastic demand
  • inelastic demand
  • completely inelastic demand
46
Q

what are the values of PED for perfectly elastic demand

A

PED = infinity

47
Q

what are the values of PED for elastic demand

A

PED > 1

48
Q

what are the values of PED for unit elastic demand

A

PED = 1

49
Q

what are the values of PED for inelastic demand

A

PED < 1

50
Q

what are the values of PED for completely inelastic demand

A

PED = 0

51
Q

how does substitutability effect price elasticity of demand

(factors determining price elasticity of demand)

A
  • very close substitute, high elasticity (sprite and 7 up)
  • no substitute more likely to be inelastic
52
Q

how does percentage of income effect the price elasticity of demand

(factors determining price elasticity of demand)

A
  • big income purchase = more elastic, because it would cost a lot more of the income if price increased slightly
  • low income purchase like chocolate = more inelastic, goes up 20p doesn’t matter
53
Q

how does necessities or luxuries effect the price elasticity of demand

(factors determining price elasticity of demand)

A

if no close substitue
- demand for necessities inelastic
- demand for luxuries inelastic

if close subsititute
- demand for necessities elastic
- demand for luxuries little elastic

54
Q

how does the width of the market definition determine price elasticity of demand

(factors determining price elasticity of demand)

A

the wider the market definition the lower the price elasticity of demand is

e.g the demand for bread produced by one baker is more elastic than all the bread produced by all the bakeries

55
Q

how does time effect the price elasticity of demand

(factors determining price elasticity of demand)

A

for many goods and services:
- demand is more elastic in the long-run, because it takes time to respond to change
but
- short-run if petrol suddenly rose, people would respond fast

56
Q

how to tell if price is inelastic or elastic without the formula

A
  • total consumer expenditure increases in response to a price fall, demand is elastic
  • total consumer expenditure decreases in response to a price fall, demand is inelastic
  • total consumer expenditure remains constant to price fall, demand is unitary
57
Q

income elasticity is always negative for…

A

an inferior good

because quantity demanded falls as income rises for an inferior good

58
Q

income elasticity is always positive for

A

a normal good

because quantity demanded rises as income rises for a normal good

59
Q

what are the 2 types of goods a normal good is made up of

A
  • luxury goods
  • basic goods
60
Q

what are the values of income elasticity for luxury goods

A

greater than +1

61
Q

what are the values of income elasticity for basic goods

A

lying between 0 and +1

62
Q

as income rises the demand for a normal good…

A

rises

63
Q

as income rises the demand for a luxury good…

(parts of a normal good)

A

rises proportionally

64
Q

as income rises the demand for a basic good…

(parts of a normal good)

A

rises at a slower rate however

65
Q

what are the 3 possibilities of cross-elasticity of demand

A
  • complementary goods (joint demand
  • substitutes (competing demand)
  • no demand relationship
66
Q

what is the x and y axis of a supply curve

A

y axis = price
x axis = quantity supplied

/ due to being directly proportional

67
Q

what are the 4 conditions of supply

A
  • costs of production
  • technical process
  • taxes imposed on firms
  • subsidies granted by the government to firms
68
Q

what are the 4 features of costs of production

A
  • wage costs
  • raw material costs
  • energy costs
  • costs of borrowing
69
Q

what is the formula for price elasticity of supply

A

percentage change in quantity supplied / percentage change in price

70
Q

what are the 5 supply curves you need to know

A
  • perfectly elastic supply
  • elastic supply
  • unit elastic supply
  • inelastic supply
  • perfectly inelastic supply
71
Q

what are the 5 factors determining price elasticity of supply

A
  • length of the production period
  • availability of spare capacity
  • ease of accumulating stocks
  • the ease of switching between alternative methods of production
  • the number of firms in the market and the ease of entering the market
  • time
72
Q

how does the length of the production period effect the price elasticity of supply

5 factors determining price elasticity of supply

A

firms convert raw materials into goods quickly supply = more elastic

73
Q

how does the availability of spare capacity effect price elasticity of supply

5 factors determining price elasticity of supply

A

spare capacity can produce more and work at full capacity in short-term to react quickly to a change in demand

74
Q

how does the ease of accumulating stock effect price elasticity of supply

5 factors determining price elasticity of supply

A

firms can react to a change in demand due to unsold goods being stored cheaply

75
Q

how does the ease of switching between alternative methods of production effect the price elasticity of supply

5 factors determining price elasticity of supply

A

easier to switch more elastic supply is

  • because if demand increased switch to capital production more than labour and constantly produce without tiring or needing breaks
76
Q

how does the number of firms in the market and the ease of entering the market effect the price elasticity of supply

5 factors determining price elasticity of supply

A

more firms in the market, easier to enter and leave, the greater the elasticity of supply

77
Q

how does time effect the price elasticity of supply

5 factors determining price elasticity of supply

A
  • short-run if able to react quickly is elastic but not as elastic as long-run
  • takes time to react to change, so long-run is more supply elastic if demand is long-lasting
78
Q

equilibrium definition

A

a state of balance between opposing forces

79
Q

disequilibrium definition

A

a situation in a market when there is excess supply or excess demand

80
Q

market equilibrium definition

A

unless some event disturbs the equilibrium there is no reason for the price to change

81
Q

when is a market in equilibrium

A

when planned demand = planned supply
- and there is no excess demand or supply

82
Q

market disequilibrium definition

A

exists at any price other than equilibrium

83
Q

when is a market in disequilibrium

A

when planned demand doesn’t = planned supply
- excess demand or supply

84
Q

excess supply definition

A

when firms wish to sell more than consumers which to buy,
- price falls to meet at new equilibrium

85
Q

excess demand definition

A

when consumers wish to buy more than firms wish to sell
- price rises to meet at new equilibrium

86
Q

joint supply definition

A

when one good is produced, another is also produced from the same raw materials

87
Q

competing supply definition

A

when raw materials are used to produce one good they cannot be used, to produce another good

88
Q

example of 2 goods in joint supply

A

market for beef and market for leather

89
Q

example of 2 goods in competing supply

A

food and biofuels

90
Q

complementary good definition

A

a good in joint demand,
- a good which is demanded at the same time as the other good

91
Q

substitute good definition

A

a good in competing demand, namely a good which can be used in place of the other good

92
Q

composite demand definition

A

demand for a good which has more than one use

93
Q

derived demand definition

A

demand for a good which is an input unto the production of another good

94
Q

example of complementary good

A

sony consoles, sony games

95
Q

example of substitute goods

A

sony consoles and xobx consoles

96
Q

speculative good definition

A

The decision to buy a good is based on the expectation that the prices are expected to rise rather than for the purpose of consuming the good itself

97
Q

veblen good definition

A

A good that enjoys “snob appeal” i.e. the goods become more attractive as price rises because few people can afford to buy the goods e.g. designer goods.

98
Q

explain the market for lemons

A

look up video econplus dal or ezyeconomics

99
Q

allocative efficiency definition

A

occurs when the available economic resources are used to produce the combination of goods and services that best matches people’s tastes and preferences

100
Q

productive efficiency definition

A

for the economy as a whole occurs when it is impossible to produce more of one good without producing less of another.

101
Q

what is productive efficiency for a firm definition

A

when the average total costs of production is minimised

102
Q

merit good definition

A

a good which when consumed leads to benefits which other people enjoy, or a good for which the long-term benefit of consumption exceeds the short-term benefit enjoyed by the person consuming the good

103
Q

how can a merit good be determined

A

through valued judgement

104
Q

what is one often negative of a merit good

A

both under-consumed and under-provided for

105
Q

why are merit goods underprovided for and under-consumed

A

because they are too expensive

e.g healthcare is too expensive for some so they don’t pay it and take the risks

Economics From the book (11 decks)

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