4.1.3 Price Determination In A Competitive Market

Question 1

Demand

Answer 1

The quantity of a good or service that consumers are willing and able to buy at a given price during a given period of time

Question 2

What causes expansions and contractions on the demand curve?

Answer 2

Changes in price

Question 3

What factors shift the demand curve?

Answer 3

Population
Income 
Related goods
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Trends
Expectations
Seasons

Question 4

What is the law of diminishing marginal utility?

Answer 4

As an extra unit of a good is consumed, the marginal utility, ie the benefit derived from consuming the good goes down. Therefore consumers are willing to pay less for the good

Question 5

Rationing function

Answer 5

Rising prices due to a shortage means that less will be consumed e.g high price of diamonds

Question 6

Signalling function

Answer 6

Prices signal what is available, conveying information to producers and consumers

Question 7

Derived demand

Answer 7

Goods that are demanded because they are needed for the production of other goods e.g bricks for buildings

Question 8

Composite demand

Answer 8

A good that is demanded for at least 2 distinct purposes e.g sugar cane for ethanol and food

Question 9

Inferior goods

Answer 9

When Income increases, demand goes down the

YED<0

Question 10

Price elasticity of demand

Answer 10

% change in quantity demanded/%change in price

Question 11

When is PED >1

Answer 11

When the good is price elastic

Question 12

When is PED=1?

Answer 12

When the good Is Unitary elastic

Question 13

When is PED=0?

Answer 13

When the good is Perfectly inelastic

Question 14

When is PED=infinity?

Answer 14

When the good is Perfectly elastic

Question 15

What factors influence PED?

Answer 15

Necessity
Substitutes
Addictiveness
Proportion of income spent on good
Durability of good
Peak and off peak demand

Question 16

What curve do taxes shift?

Answer 16

The supply curve

Question 17

How do subsidies affect supply curve?

Answer 17

Outward shift in supply

Question 18

Income elasticity of demand

Answer 18

% change in quantity demanded/% change in income

Question 19

Normal good

Answer 19

When I come increases demand increases

YED>0

Question 20

Luxury goods

Answer 20

Increase in income causes large increase in demand

YED>1

Question 21

Cross elasticity of demand

Answer 21

% change in quantity demanded of x/ %change in price of y

Question 22

What is the XED of complementary goods?

Answer 22

Negative XED because If one good becomes more expensive the quantity demanded for both decreases

Question 23

What is the XED of close compliments

Answer 23

A small fall in the price of good x leads to a large increase of quantity demanded of y

Small negative value

Question 24

What is the XED for weak compliments

Answer 24

A large fall in the price of good x leads to only a small increase in QD of y

Large negative value

Question 25

XED for substitutes

Answer 25

Positive XED

Question 26

Supply

Answer 26

The quantity of a good or service that a producer is able and willing to supply at s given price and given time period

Question 27

What shifts the supply curve?

Answer 27

``` Productivity Indirect taxes Number of firms Technology Subsidies Weather Costs of production ```

Question 28

What causes movements along the supply curve?

Answer 28

Change in price

Question 29

Veblen goods

Answer 29

Goods sold on the basis that they cost more than their competitors e.g supreme

Question 30

Joint supply

Answer 30

When the production of one good leads to the production of another good e.g increase in beef=increase in leather

Question 31

Price elastic of supply

Answer 31

% change in quantity supplied/%change in price

Question 32

When is PES>1

Answer 32

When supply is elastic

Question 33

When is PES<1

Answer 33

When supply is inelastic

Question 34

When is PES=0

Answer 34

Perfectly inelastic, supply is fixed

Question 35

When is PES=infinity

Answer 35

Perfectly elastic, any Q can be met without changing the price

Question 36

Factors influencing PES

Answer 36

``` Time scale Spare capacity Level of stocks How substitutable factors are Barriers to entry to the market ```

Question 37

Joint demand

Answer 37

When goods are bought together such as a digital camera and a memory card

Question 38

When is PED<1

Answer 38

When the good is relatively inelastic

Question 39

When is there excess supply?

Answer 39

When price is above equilibrium

Question 40

When is the excess demand

Answer 40

When price is below equilibrium