Micreoeconomics, Part 2- Price Determination in a Competitive Market Flashcards Preview

AS AQA Economics > Micreoeconomics, Part 2- Price Determination in a Competitive Market > Flashcards

Flashcards in Micreoeconomics, Part 2- Price Determination in a Competitive Market Deck (60)
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1

Demand definition:

The amount that consumers are willing and able to buy at each given price.

2

What does the demand curve look like?

-y axis = P
-x axis = Q
-Straight line between the ends of the axes, negative correlation. Line labelled D
-Origin = O

3

Law of diminishing marginal return / utility definition:

As we buy more of one item, the benefit we receive falls, therefore we will only buy more when the price falls.

4

Extension in demand definition:

Increases in quantity demanded caused by falls in price.

5

What does an extension in demand look like on the demand curve?

P
P1
Q Q1

6

Contraction in demand definition:

Decrease in quantity demanded caused by rising prices.

7

What does a contraction in demand look like on the demand curve?

P1
P
Q1 Q

8

What does an increase in demand look like on the demand curve?

P
P
Q Q1
-A line where lower P and Q meet
-A line where higher P and Q1 meet.

9

Why does an increase in demand look the way it does on the demand curve?

Because at the same price, the demand has increased from Q to Q1.

10

What are the reasons that demand increases?

-Fashion
-Price of substitutes
-Increase in population
-Changes in income
-Advertising and publicity
-Prices of complementary products
-Consumer confidence
-Changes in quality
-Weather conditions
-The law
-Uncertainty over future prices
-Interest rates
-Consumer tastes and preferences

11

Inferior good definition:

Goods or services that will see demand fall when income rises.

12

Normal good definition:

Goods or services that will see an increase in demand when income rises.

13

Substitute definition:

Replacement for another product.

14

Composite demand definition:

A good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the supply for the other. e.g. milk and butter- Farmer Stone

15

Derived demand definition:

When the demand for one good or service comes from the demand for another good or service. One has to be a component of the other e.g. an increase in the demand for phones increases the demand for precious metals.

16

Complementary good definition:

Goods that are consumed together.

17

Price elasticity of demand definition:

Measures the responsiveness of the quantity demanded to a change in the price of the good.

18

Formula for PeD:

% change in quantity demanded / % change in price

19

If the PeD is above 1, what type of elastic demand does the good have?

Price elastic.

20

If the PeD is between 0 and 1, what type of elastic demand does the good have?

Price inelastic.

21

In an elastically demanded good, how does quantity demanded compare with the price cut?

The quantity demanded rises by proportionately more than the price cut.

22

In an inelastically demanded good, how does quantity demanded compare with the price cut?

The quantity demanded rises by proportionately less than the price cut.

23

In an elastically demanded good, what happens to revenue when price falls?

It increases.

24

In an elastically demanded good, what happens to revenue when price rises?

It decreases

25

What does the diagram of a perfectly elastic good look like?

The demand curve is horizontal.

26

What does the diagram of a perfectly inelastic good look like?

The demand curve is vertical.

27

What is the PeD of a perfectly elastic good?

Infinite

28

What is the PeD of a perfectly inelastic good?

0

29

What does the demand curve of a good with a PeD of 1 look like?

A curve that never touches either axes

30

What are the factors that affect PeD?

-Availability of substitutes
-Time
-Whether the good is a luxury or necessity
-Proportion of income spent on good