Competitive Markets

Question 1

What is a market?

Answer 1

A market is anywhere buyers & sellers can exchange goods & services

Question 2

What is demand?

Answer 2

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

Question 3

What does the demand curve show?

Answer 3

The relationship between price and quantity demanded

Question 4

What does a decrease in price cause, on a demand curve?

Answer 4

An extension in demand

Question 5

What does an increase in price cause, on a demand curve?

Answer 5

A contraction in demand

Question 6

When does a demand curve shift?

Answer 6

When there is a change in quantity demanded but not price

Question 7

What could shift a demand curve?

Answer 7

Population
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Price of substitutes
Income
Fashion & tastes
Interest rates
Complementary goods’ price

Question 8

What are substitute goods?

Answer 8

Goods that are alternatives to each other, when one increases in price its demand will decrease, but demand for the other good will increase

Question 9

What are complementary goods?

Answer 9

Goods that are often used together, if price increases for one then the demand for both will decrease, because people don’t want one without the other

Question 10

What is derived demand?

Answer 10

The demand for a good or service that is needed to make another good or service. For example demand for fencing will increase demand for wood

Question 11

What is composite demand?

Answer 11

When a good can be used for more than one thing. For example, an increase in demand for a product may leads to a decrease in supply for another product.

Question 12

What is price elasticity of demand?

Answer 12

A measure of how quantity demanded for a good responds to a change price

Question 13

What is the formula for PED?

Answer 13

% change in quantity demanded/ % change in price

Question 14

If PED is between 0 and -1, how elastic is it?

Answer 14

It is inelastic

Question 15

If PED is between -1 and -∞, how elastic is it?

Answer 15

It is elastic

Question 16

What will PED always be less than?

Answer 16

0, it will always be negative

Question 17

What shape is a perfectly elastic demand curve?

Answer 17

A straight horizontal line

Question 18

What shape is a perfectly inelastic demand curve?

Answer 18

A straight vertical line

Question 19

What is income elasticity of demand?

Answer 19

A measure of how much the demand of a good changes with a change in real income

Question 20

What is the formula for income elasticity of demand?

Answer 20

% change in quantity demanded of a good/% change in real income

Question 21

What is the YED of an inferior good when it is elastic?

Answer 21

YED is between -∞ and -1

Question 22

What is the YED of an inferior good when it is inelastic?

Answer 22

YED is between -1 and 0

Question 23

What is the YED of a necessity good?

Answer 23

YED is between 0 and 1

Question 24

What is the YED of a luxury good?

Answer 24

YED is between 1 and ∞

Question 25

What is cross elasticity of demand?

Answer 25

A measure of how the quantity demanded of a good responds to a change in price of another good

Question 26

What is the formula for XED?

Answer 26

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

Question 27

What does a positive XED between two goods show?

Answer 27

They are substitute goods

Question 28

What does a negative XED between two goods show?

Answer 28

They are complementary goods

Question 29

What is supply?

Answer 29

The quantity of a good or service that producers supply to a market at a given price, in a specific period of time

Question 30

What does an increase in price show, on the supply curve?

Answer 30

An extension in supply

Question 31

What does a decrease in price show, on a supply curve?

Answer 31

A contraction in supply

Question 32

What are the causes of the supply curve shifiting?

Answer 32

Productivity Indirect tax Number of firms Technology Subsidy Weather Costs of production

Question 33

What is joint supply?

Answer 33

When the production of one good or service involves the production of another good or service

Question 34

What is price elasticity of supply?

Answer 34

A measure of how the quantity supplied of a good responds to a change in its price

Question 35

What is the formula for PES?

Answer 35

% change in quantity supplied/% change in price

Question 36

What is the value of PES always between?

Answer 36

0 and infinity, it is always positive

Question 37

When is PES inelastic?

Answer 37

When it is between 0 and 1

Question 38

When is PES elastic?

Answer 38

When it is between 1 and infinity

Question 39

What is supply in the short run?

Answer 39

Price inelastic

Question 40

What is supply in the long run?

Answer 40

It is more elastic

Question 41

When is a market in equillibrium?

Answer 41

When supply equals demand

Question 42

Where is consumer surplus on the supply & demand diagram

Answer 42

Above the equilibrium price line

Question 43

Where is producer surplus on the supply & demand diagram?

Answer 43

Below the equilibrium price line

Question 44

What is a subsidy?

Answer 44

Money paid by the government to the producer of a good/service to make it cheaper than it would be normally

Question 45

What is the income effect?

Answer 45

As incomes rise, demand rises, because our money can buy more. The same happens if income falls

Question 46

What is the substitution effect?

Answer 46

As price increases for one good or service, consumers will switch their spending to another good or service, so quantity demanded for the original good decreases

Question 47

How does the price mechanism work?

Answer 47

1) Signals excess demand or supply and the need to increase/decrease resources 2) Incentivises producers to increase/decrease output to increase profit 3) Ration scarce resources by encouraging/discouraging consumption 4) Allocates scarce resources efficiently