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Economics > 4.1.3 Price Determination > Flashcards

4.1.3 Price Determination Flashcards

1
Q

What is a market?

A

An institution connecting buyers with product and sellers with money
(Not necessarily a physical place)

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2
Q

What is demand?

A

The quantity of a product consumers are willing and able to buy at each price in a given time period

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3
Q

What are the determinants of demand?

A
  • advertising/ marketing
  • complementary product price/availability
  • population
  • substitute product price/availability
  • branding/fashion/tastes
  • disposable income
  • environment/weather
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4
Q

What is the law of demand?

A

As price increases, quantity demanded falls, vice versa, ceteris paribus

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5
Q

What are some of the exceptions to the law of demand?

A

Veblen goods - products for conspicuous consumption
Speculate goods - bought as price increases in hope that price increase will continue
Giffen goods - really inferior goods (demand decreases as income increases)

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6
Q

What is marginal production?

A

The addition to total production from having one more worker

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7
Q

What is marginal cost?

A

The addition to total cost from buying one more unit

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8
Q

What is PED?

A

Price elasticity of demand: the responsiveness of the quantity demanded of a product to changes in price of the product
Formula: %Δ QDx / %Δ Px

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9
Q

What is totally inelastic demand?
What does it look like on a P-Q graph?

A

When PED = 0

Vertical line on P-Q graph

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10
Q

What is totally elastic demand?
What does it look like on P-Q graph?

A

When PED = -♾️

Horizontal line on P-Q graph

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11
Q

When PED is less than -1, is demand fairly elastic or inelastic?

A

When PED < -1, demand is fairly elastic

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12
Q

When PED is between 0 and -1, is demand fairly elastic or inelastic?

A

When -1 < PED < 0, demand is fairly inelastic

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13
Q

How can revenue be used to judge PED (if elastic or inelastic)?

A

Elastic PED: increased price -> decreased revenue
Inelastic PED: increased price -> increased revenue

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14
Q

What are the determinants of PED?

A

SPLAT:
- availability of Substitutes
- Proportion of income spent on product
- Luxury vs necessity
- Addiction/habit/branding (negative correlation)
- Time

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15
Q

What is supply?

A

The quantity of a product that producers are willing and able to supply onto the market at each price in a given time period

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16
Q

Why do firms supply?

A

To make profit (revenue - cost)

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17
Q

What is the law of supply?

A

As price increases, the quantity supplied increases, vice versa, ceteris paribus

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18
Q

What are the determinants of supply?

A

PINTSWC
- Productivity
- Indirect taxes (negative correlation)
- Number of firms/producers
- Technology
- Subsidies
- Weather
- Cost of production (negative correlation)

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19
Q

What is consumer surplus?

A

The difference between what the consumers are willing to buy each product for and the price it actually costs

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20
Q

What is producer surplus?

A

The difference between what the producers are willing to sell each product for and the price they actually get

21
Q

What is PES?

A

Price elasticity of supply: the responsiveness of the quantity supplied of a product to changes in the price of that product
Formula: %Δ QSx / %Δ Px

22
Q

What is totally inelastic supply?
What does it look like on a P-Q graph?

A

When PES = 0
Vertical line on P-Q graph

23
Q

What is totally elastic supply?
What does it look like on a P-Q graph?

A

When PES = ♾️
Horizontal line on P-Q graph

24
Q

What is the elasticity of supply when PES is between 0 and 1?

A

Fairly inelastic

25
Q

What is the elasticity of supply when PES is greater than 1?

A

Fairly elastic

26
Q

What is unitary elasticity?

A

When PES = 1
Applies for all straight line supply through the origin

27
Q

What are the determinants of PES?

A
  • availability/cost of resource
  • time
  • amount of spare capacity
  • amount of stock
  • closeness of producer substitutes
  • ease of entry to market
28
Q

What is equilibrium/ allocative effieciency?

A

When supply = demand
Economic forces are in balance and so price and quantity (supplied/demanded) will not change, ceteris paribus

29
Q

Why is equilibrium a desired quantity?

A

It balances cost and utility (allocative efficiency)

30
Q

What is productive efficiency?

A

Anywhere on a PPC/PPF, as that maximises output

31
Q

What happens when demand increases (shifts right)?

A

Higher quantity is demanded, quantity equilibrium is supplied
Shortage as D>S
Buyers are willing to pay more, sellers take advantage and increase price
Leading to an extension in supply, and a contraction in demand
So price increases until equilibrium and market clears again

32
Q

What happens when supply increases (shifts right)?

A

Higher quantity supplied, quantity equilibrium demanded
Surplus created as S>D
Sellers will decrease price as buyers offer less
Leading to a contraction in supply, and an extension in demand
So price decreases until equilibrium

33
Q

What is YED?

A

Income elasticity of demand: the responsiveness of the quantity demanded of a product to changes in income
Formula: %Δ QDx / %Δ Y

34
Q

What is the income elasticity when YED is greater than 1, and what type of good has this YED?
What does it look like on a Y-QDx graph?

A

Highly income elastic
Luxury good
Horizontal line on Y-QDx graph

35
Q

What is the income elasticity when YED is between 0 and 1, and what type of good has this YED?

A

Highly income inelastic
Necessity

36
Q

What is the elasticity of income when YED is less than 0, and what type of goods have this YED?

A

Negative income elasticity
Inferior good

37
Q

What is XED?

A

Cross-price elasticity of demand: the responsiveness of the quantity demanded of one product to changes in price of another product
Formula: %Δ QDx / %Δ Py

38
Q

What type of products have a positive XED?

A

Substitutes

39
Q

What type of products have a negative XED?

A

Complements

40
Q

What type of products have an XED of 0?

A

Unrelated products

41
Q

What type of products have an XED of ♾️?

A

Extremely closely related products

42
Q

Why does price move in accordance with market forces?

A

To help allocate resource

43
Q

What are the 3 functions by which price helps to allocate resource?

A
  1. Signal function - tells producers to increase quantity supplied
  2. Incentive - price increases so that firms can increase profit so producers switch to that product
  3. Rationing mechanism - price limits who can buy luxury items
44
Q

What happens if price is allowed to fulfil the functions to help allocate resource?

A

More efficient allocation of resource, at the cost of inequality, provision of harmful products, and pollution/ environmental destruction

45
Q

What is derived demand?

A

If the demand for a product increases, the demand for the resource used to make the product also increases (e.g. cars and steel)

46
Q

What is joint demand?

A

If the demand for a product increases, the demand for a complimentary product will also increase

47
Q

What is competitive demand?

A

If the demand for one product increases, the demand of a substitute will decrease

48
Q

What is composite demand?

A

If more of a product is sold, the supply of a product made of the same resource will decrease

49
Q

What is joint supply?

A

If the demand for a product increases, the supply of a by-product of this product will increase (e.g. beef and leather)

Economics (10 decks)

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