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A Level Economics > 4.1.3 Price Determination In A Competitive Market > Flashcards

4.1.3 Price Determination In A Competitive Market Flashcards

1
Q

Demand

A

is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period

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2
Q

Effective demand

A

is demand supported by the necessary purchasing power (the ability to pay)

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3
Q

Not effective demand

A

If a consumer is willing to purchase a good, but cannot afford to

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4
Q

Cerberus park us

A

All other variables remain constant

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5
Q

Law of demand

A

The law of demand states that there is an inverse relationship between price and quantity demanded (QD),

When the price rises, the QD falls
When the price falls, the QD rises

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6
Q

Market demand

A

the combination of all the individual demand for a good/service

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7
Q

Demand graph

A

negative gradient demand curve
Price y axis
Quantity x axis
As quantity rise price falls and demand is lower and opposite for other way round

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8
Q

What happens to demand graphs when price rises

A

Quantity falls and demand increases

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9
Q

Factors that will change demand

A

Changes in real income
Changes in tastes/preferences
Changes in the price of related goods (substitutes and complements)
Changes in the number of consumers
Future price expectations

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10
Q

What does a change to conditions of demand do to demand graph

A

Shift the entire demand curve

Eg. if a firm increases their Instagram advertising, there will be an increase in demand as more consumers become aware of the product
This is a shift in demand from D to D1. The price remains unchanged at £7 but the demand has increased from 15 to 25 units

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11
Q

What does real income determine

A

how many goods and services can be purchased by consumers

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12
Q

Substitute goods

A

Two goods that could be used for the same purpose by the consumer

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13
Q

Complementary goods

A

Two products that the consumer uses together

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14
Q

How do future price expectations change demand

A

If consumers expects the price of a good/service to increase in the future, they will purchase it now, and demand will increase

Vice versa with expectation with a price decrease

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15
Q

Example of how Covid 19 led to decrease in demand

A

Reduced disposable income as unemployment increased
Changing preferences for safer dining options
Government restrictions on indoor dining

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16
Q

Real life example of an increase in demand

A

In 2023, global demand for Taylor Swift concerts surged as a result of her music becoming more popular
This is considered to be a change in tastes and preferences

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17
Q

Supply

A

The amount of a good/service that a producer is willing and able to supply at a given price in a given time period

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18
Q

Supply curve slope

A

Slopes upward as there is a positive relationship between the price and quantity supplied

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19
Q

What does rational profit maximising producers aim to do

A

Rational profit maximising producers would want to supply more as prices increase in order to maximise their profits

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20
Q

Law of supply

A

there is a positive (direct) relationship between quantity supplied and price
When the price rises, the QS rises
When the price falls, the QS falls

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21
Q

Market supply

A

the combination of all the individual supply for a good/servic

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22
Q

What happens to supply curve is price is the only factor that changes

A

There will be a change in quantity supplied

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23
Q

What factors change the supply of a good/service

A

Changes to the costs of production
Changes to indirect taxes and subsidies
Changes to technology
Changes to the number of firms
Weather events
Future price expectations
Goods in joint and competitive supply

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24
Q

How do changes to costs of production affect supply

A

If the price of raw materials or other costs of production change, firms respond by changing supply

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25
Q

How does changes in indirect taxes affect condition of supply

A

Any changes to indirect taxes change the costs of production for a firm and impact supply

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26
Q

Indirect tax

A

A tax on consumption. Only paid if a good/service is purchased

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27
Q

Producer subsidy

A

An amount of money paid to the firm by government for each unit produced

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28
Q

How do changes in subsidies affect condition of supply

A

Changes to producer subsidies directly impact the costs of production for the firm

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29
Q

How do changes in new technology in condition of supply

A

New technology increases productivity and lowers production costs
Ageing technology can have the opposite effect

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30
Q

Productivity

A

Output per unit of input used

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31
Q

How do changes in number of firms in the industry

A

The entry and exit of firms into the market have a direct impact on the supply

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32
Q

How do weather events affect supply

A

Droughts or flooding can cause a supply shock in agricultural markets
A drought will cause supply to decrease.

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33
Q

How to future price expectations affect supply

A

If firms expects the price of a good/service to increase in the future, they will start supplying more
If firms expects the price of a good/service to decrease in the future, they will start supplying less

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34
Q

How do goods in joint supply affect supply

A

When there is an increase of supply of one good in joint supply (e.g. beef), possibly due to higher prices, there will be an increase in supply of the other good too (e.g. leather)

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35
Q

Joint supply

A

Occurs when the supply of two different goods stem from the same source

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36
Q

Competitive in supply

A

Occurs when the factors of production can be used to produce different goods so that an increase in the supply of one requires a reduction in the supply of another

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37
Q

How do changes in goods in competitive supply affect supply

A

Farmers can produce many goods which are competitive in supply
E.g. A farmer can grow wheat or potatoes. When they increase the supply of potatoes, the supply of wheat decreases

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38
Q

Example of a decrease in supply

A

In 2023, the supply of UK-grown tomatoes declined as a consequence of rising energy costs
Energy prices increased due to supply chain issues, causing the cost of operating greenhouses to rise

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39
Q

Example of an increase in supply

A

Advances in technology have led to an increase in the supply of lettuce
Greater mechanisation and innovations in genetically modified food increase productivity and output

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40
Q

Market system

A

Also known as the free market system. Prices works to allocate scarce resources efficiently. Through the forces of demand supply

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41
Q

What are prices for goods/services determined by

A

The interaction of demand and supply

42
Q

Market

A

Any place that brings buyers and sellers together

43
Q

How do buyers agree the price

A

By purchasing the good/service

44
Q

How to sellers choose a price

A

Equilibrium price where supply meets demand

45
Q

Market disequilibrium

A

Disequilibrium occurs when demand is not equal to supply
If demand > supply, the market is facing excess demand
If demand < supply, the market is facing excess supply

46
Q

Excess demand

A

Excess demand occurs when the demand is greater than the supply
It can occur when prices are too low or when demand is so high that supply cannot keep up with it

47
Q

Market response to disequilibrium

A

Sellers are frustrated that products are selling so quickly at a price that is obviously too low
Some buyers are frustrated as they will not be able to purchase the product

48
Q

Sellers response to market disequilibrium

A

Sellers realise they can increase prices and generate more revenue and profits

49
Q

Excess supply

A

occurs when the supply is greater than the demand
It can occur when prices are too high or when demand falls unexpectedly

50
Q

Market response to excess supply

A

Sellers are frustrated that the masks are not selling and that the price is obviously too high
Some buyers are frustrated as they want to purchase the masks but are not willing to pay the high price

51
Q

Sellers response to excess supply

A

Sellers will gradually lower prices in order to generate more revenue

52
Q

Causes of price changes

A

Market equilibrium can change every few minutes in some markets or every few weeks or months in other

53
Q

Consequences of price changes

A

Any change to a condition of demand or supply will temporarily create disequilibrium, and market forces will then seek to clear the excess demand or supply

54
Q

Examples to change to demand that increase price

A

Pandemic led to unexpected high demand of furniture
Demand curve shifts right

55
Q

Example of change in supply that increased price

A

In 2022, hurricane Fiona destroyed much of puerto ricos crop of plantains
This led to decrease in supply and supply curve shifting left

56
Q

Real life changes to demand that decrease price

A

Demand for lobsters in Maine, USA, has been falling steadily in recent months
This has resulted in a price fall from $12.35 per pound on the 1st April to $9.35 per pound on the 1st May
This is due to increasing rate of inflation in USA which lowers purchasing power
Decrease price to clear excess supply

57
Q

Real lie example changes to supply decrease price

A

In order to help meet their climate targets and to lower energy costs for households, the EU is providing subsidies for solar panels
Supply shifts right

58
Q

Law of demand

A

States that when there is an increase in increase, there will be a fall in the quantity demanded

59
Q

Price elasticity of demand

A

how responsive the change in quantity demanded is to a change in price

60
Q

Calculation of PED

A

%change in quantity demanded/% change in price

61
Q

When is sales revenue maximised

A

If their product is price inelastic in demand, they should raise their prices
If their product is price elastic in demand, then they should lower their prices

62
Q

Example of inelastic and elastic sections in a market

A

They lower their prices for elastic sections of their market e.g. off peak train travel
They increase prices for inelastic sections of their market e.g. peak hour train trave

63
Q

What happens when a good/service is price elastic in demand

A

there is a greater than proportional increase in the quantity demanded to a decrease in price

A small decrease in price leads to a larger increase in QD

64
Q

What happens when a good/service is price inelastic in demand

A

there is a smaller than proportional decrease in the quantity demanded to an increase in price
A large increase in price leads to a smaller decrease in QD

65
Q

Factors that influence PED

A

Availability of substitutes, addictiveness of the product, price of product as the proportion of income , time period

66
Q

How does availability of substitutes influence PED

A

Good availability of substitutes results in a higher value of PED (relatively elastic)

67
Q

How does addictiveness of the product influence PED

A

addictiveness turns products into necessities, resulting in a low value of PED (relatively inelastic)

68
Q

How does price of product as a proportion of income affect PED

A

the lower the proportion of income the price represents, the lower the PED value will be. Consumers are less responsive to price changes on cheap products (relatively inelastic)

69
Q

How does time period affect PED

A

In the short term, consumers are less responsive to price increases, resulting in a low value of PED (relatively inelastic). Over a longer period of time, consumers may feel the price increase more and will then look for substitutes, resulting in a higher value of PED (relatively elastic)

70
Q

Income elasticity of demand (YED)

A

how responsive the change in quantity demanded is to a change in income

71
Q

What is the income elasticity of demand (YED) calculation

A

% change in quantity demanded/ % change in income

72
Q

Normal good

A

A good for which the quantity increases when income increass

73
Q

What does positive YED consider

A

Normal

74
Q

What does a good with a negative YED consider

A

Inferior good

75
Q

Inferior good

A

A good for which the quantity demanded decreases when income increases

76
Q

YED value 0-1

A

Normal necessity

Demand increases when income increases
Income inelastic, which means that it is relatively unresponsive to a change in income

77
Q

YED > 1

A

Normal luxury

Demand increases when income increases
Income elastic, which means that it is relatively responsive to a change in income

78
Q

YED < 0

A

Inferior
Demand decreases when income increases

79
Q

Cross price elasticity of demand (XED)

A

reveals how responsive the change in quantity demanded for good A is to a change in price of good B

80
Q

Cross price elasticity of demand (XED) calculation

A

% change in quantity demanded of good A/ % change in price of good B

81
Q

What type of good is a negative XED value

A

Complementary good

82
Q

What type of good is a positive XED value

A

Substitute good

83
Q

XED value < 0

A

Complementary good

The negative value indicates the two goods are complements
The higher the value the stronger the relationship

84
Q

XED > 0

A

Substitutes

The positive value indicates the two goods are substitutes
The higher the value, the stronger the relationship

85
Q

XED = 0

A

Unrelated goods

A value of zero indicates that there is no relationship between the two goods.
The closer to zero, the weaker the relationship is

86
Q

What does law of supply state

A

when there is an increase in price (ceteris paribus), producers will increase the quantity supplied and vice versa

87
Q

Price elasticity of supply

A

how responsive the change in quantity supplied is to a change in price

88
Q

Price elasticity of supply calculation

A

% change in quantity supplied/ % change in price

89
Q

PED value 0

A

Perfectly inelastic
The QS is completely unresponsive to a
change in P (e.g. fixed number of seats in a theatre)

90
Q

Relatively inelastic value 0-1

A

The %∆ in QS is less than proportional
to the %∆ in P (e.g agricultural products)

91
Q

Relatively elastic 1-∞

A

Relatively elastic

The %∆ in QS is more than proportional
to the %∆ in P (e.g t-shirts)

92
Q

PED value ∞

A

Effector elastic

The %∆ in QS will fall to zero with any %∆ in P. However, supply is unlimited at a particular price. This is a very theoretical scenario

93
Q

How does mobility of the factors of production influence price elasticity of supply

A

If producers can quickly switch their resources between products, then the PES will be more elastic. E.g. If prices of hiking boots increase and shoe manufacturers can switch resources from producing trainers to boots, then boots will be price elastic in supply

94
Q

How does the rate at which costs of production increase influence price elasticity of supply

A

It costs more to produce each additional unit of output (marginal cost). If the rate of the marginal cost increase is low, the quantity supplied will be more elastic. However, if marginal costs rise quickly, then the quantity supplied will be more inelastic

95
Q

How does the ability to store goods influence price elasticity of supply

A

If products can be easily stored then PES will be higher (elastic) as producers can quickly increase supply (e.g. tinned food products). An inability to store products results in lower PES (inelastic)

96
Q

How does spare capacity influence price elasticity of supply

A

if prices increase for a product and there is a capacity to produce more in the factories that make those products, then supply will be elastic. If there is no spare capacity to increase production, then supply will be inelastic

97
Q

How does the time period affect the price elasticity of supply

A

In the short run, producers may find it harder to respond to an increase in prices as it takes time to produce the product (e.g. avocados). However, in the long run they can change any of their factors of production so as to produce more

98
Q

Joint demand

A

When consumers use two products together, also known as complementary goods
The change in price of one good impacts the demand for the other good
Eg. Cereal and milk

99
Q

Competitive demand

A

Two goods are used for the same purpose, also known as substitute goods
The change in price of one good impacts the demand for the other good
Cinema and online streaming services

100
Q

Composite demand

A

Two or more goods require the same input to make them
An increase in production of one good could lead to a decrease in supply of another good, as less of the input is available
Eg. Cheese and yoghurt

101
Q

Derived demands

A

Sn

A Level Economics (3 decks)

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