Competitive markets and how they work

Question 1

Define producer surplus

Answer 1

The difference between the price a producer is willing to accept and the market price actually received

Question 2

Define consumer surplus

Answer 2

The difference between what a consumer is willing to pay for a good or service and what they actually paid for it

Question 3

A fall in the market price leads to…

Answer 3

An increase in consumer surplus

Question 4

Define demand

Answer 4

The quantity of a good or service that consumers are willing and able to purchase at a given price over a specified period of time

Question 5

What are the determinants of demand?

Answer 5

• Price of good or service
• Price of substitutes
• Prices of complements
• Disposable income and wealth
• Taste and fashion

Question 6

In order to isolate the effect of just one determinant of demand, we can assume that…

Answer 6

All other determinants are constant (ceteris paribus)

Question 7

What does the demand curve show?

Answer 7

The level of demand at each and every price

Question 8

Why is the demand curve downwards sloping?

Answer 8

As the price falls, consumers become more willing and able to purchase the good or service

Question 9

How would a change in the price affect demand?

Answer 9

If price falls, there is an extension of demand.
If price increases, there is a contraction of demand.
(known as the first law of demand)

Question 10

How would a change in other determinants of demand affect demand?

Answer 10

A shift to right or left

Question 11

What is supply?

Answer 11

The quantity of a good or service that producers are willing and able to sell at a given price over a specified period of time

Question 12

What are the determinants of supply?

Answer 12

• The price of the good or service
• Changes in the costs of production
• Government policies: indirect taxes and subsidies
• Changes in technology
• The weather/climate
• Expectation of future prices and profits

Question 13

What is a normal good?

Answer 13

A good with a positive income elasticity of demand

Question 14

What is an inferior good?

Answer 14

A good for which an increase in income leads to a fall in demand

Question 15

What is the formula for the price elasticity of demand?

Answer 15

% change in quantity demanded / % change in price

Question 16

What does the PED measure?

Answer 16

It measures how responsive the quantity demanded of a product is to a change in it’s price

Question 17

If PED is greater than 1..

Answer 17

It’s elastic

Question 18

If PED is lower than 1..

Answer 18

It’s inelastic

Question 19

When can demand be perfectly inelastic?

Answer 19

When PED = 0

• Demand is completely unresponsive to changes in price
• Demand curve would be parallel to the price axis

Question 20

If PED is perfectly elastic..

Answer 20

The demand curve is parallel to the quantity axis

Question 21

Define YED

Answer 21

The responsiveness of the quantity demanded to a change in income

Question 22

How is the YED measured?

Answer 22

% change in quantity demanded / % change in income

Question 23

The values of YED can be…

Answer 23

positive or negative

Question 24

A good with a positive YED is called…

Answer 24

Normal

Question 25

A good with a negative YED is called...

Answer 25

Inferior

Question 26

What factors determine the PED?

Answer 26

S - Availability of substitutes H - Whether the consumption of the good or service is habitual I - The proportion of income spent on the good/service T - The time available to change buying patterns

Question 27

What are the limitations of the PED?

Answer 27

- Does not show actual cause and affect - Data and statistics could be innacurate - Hard to predict consumers behaviour

Question 28

As income increases, demand for inferior goods...

Answer 28

decreases

Question 29

Define XED

Answer 29

The responsiveness of the quantity demanded to a change in the price of another related good

Question 30

How is the XED measured?

Answer 30

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

Question 31

If the XED is positive..

Answer 31

The two products are subsitutes

Question 32

If the XED is negative..

Answer 32

The two products are complementary

Question 33

If two goods are substitutes, an increase in price of good B means the price of good A...

Answer 33

increases as well

Question 34

If two goods are complementary, an increase in the price of good B will mean the demand for good A...

Answer 34

Falls

Question 35

What does the size of the XED indicate?

Answer 35

The strength of the relationship between the two products

Question 36

What elasticity of demand is used to measure taste and fashion?

Answer 36

none - there is no way of measuring this

Question 37

What is PES?

Answer 37

Price elasticity of supply

Question 38

Define PES

Answer 38

The responsiveness of the quantity supplied to a change in the price of the product

Question 39

What is the formula for PES?

Answer 39

% change in Q supplied / % change in price

Question 40

If PES is greater than 1..

Answer 40

It is elastic, and supply is highly responsive to a change in price

Question 41

If PES is lower than 1..

Answer 41

It is inelastic, and supply is not very responsive to a change in price

Question 42

If PES = 0, its...

Answer 42

perfectly inelastic, a change in price has no effect on the QS

Question 43

Where is the equilibrium or market price set?

Answer 43

Where the demand curve intersects the supply

Question 44

What is allocative efficiency?

Answer 44

Where consumer satisfaction is maximised

Question 45

How does a market achieve allocative efficiency?

Answer 45

The market must function at the equilibrium position