Price Determination

Question 1

What is a market

Answer 1

A voluntary meeting of buyers and sellers in which exchange takes place

Question 2

Demand

Answer 2

Quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time

Question 3

Supply

Answer 3

Quantity of a good or service that producers are willing and able to sell at given prices in a given period of time

Question 4

Competitive markets

Answer 4

Markets in which the large number of buyers and sellers possess good market information and can easily enter or leave the market

Question 5

Ruling market price

Answer 5

Also known as equilibrium price, the price at which planned demand equals planned supply

Question 6

Effective demand

Answer 6

The desire of a good or service backed by an ability to pay for it

Question 7

Market demand

Answer 7

Quantity of a good or service that all consumers in the market are willing and able to buy at different market prices

Question 8

Individual demand

Answer 8

Quantity of a good or service that a particular consumer is willing and able to buy at different market prices

Question 9

Condition of demand

Answer 9

A determinant of demand, other than the good’s own price, that fixes the position of the demand curve. A change in condition, such as different fashion tastes, cause a shift in the demand curve

Question 10

Main conditions of demand

Answer 10

Prices of substitute goods, Prices of complementary goods, Personal income, Tastes and preferences, Population size

Question 11

Substitute goods

Answer 11

Alternative goods that could be used for the same purpose

Question 12

Complementary goods

Answer 12

When two goods are complements, they experience joint demands

Question 13

Normal good

Answer 13

A good for which demand increases as income rises and demand decreases as income falls, like clothing

Question 14

Inferior good

Answer 14

A good for which demand decreases as income rises and demand increases as income falls. An example could be inexpensive foods like ready meals or instant noodles

Question 15

Price elasticity of demand

Answer 15

Measures the extent to which the demand for a good change in response to a change in the price of that good. Calculated as %△ demand ÷ %△ price

Question 16

Factors determining price elasticity of demand

Answer 16

Substitutability- existence of substitute products greatly affects elasticity if the similar product has raised in price
% of Income- the percent of income that the product takes from consumers, a raised price with an already cheap item may barely change how the consumer views it compared to a new car for example
Necessities or Luxuries
Time- takes time to respond in a change of price

Question 17

Income elasticity of demand

Answer 17

Measures the extent to which the demand for a food changes in response to a change in income; it is calculated by %△ quantity demanded÷ %△ income

Question 18

Cross-elasticity of demand

Answer 18

Measures the extent to which the demand for a good changes in response to a change in the price of another good; calculated by %△ quantity demanded ÷ %△ price of another good

Question 19

The main conditions of supply

Answer 19

Costs of production including: wage costs, raw materials costs, energy costs, costs of borrowing
Technical progress
Taxes imposed on firms
Subsidies granted by gov to firms

Question 20

Price elasticity of supply

Answer 20

The extent to which the supply of a good changes in response to a change in the price of that good

Question 21

Factors determining price elasticity of supply

Answer 21

Length of production period
The availability of spare capacity
Ease of accumulating stocks
Ease of switching production methods
Time- market period supply, short run supply, long run supply

Question 22

Market equilibrium

Answer 22

Households plan to demand exactly the same quantity of a product that firms plan to supply so price does not change

Question 23

Excess supply

Answer 23

The unsold stock due to a larger supply over demand. The usual price becomes the disequilibrium price causing an excess in supply. Therefore to get rid of unsold stock, firms reduce price to where demand meets the new supply or any price they are willing to accept which eliminates excess supply.

Question 24

Excess demand

Answer 24

Unfulfilled demand where households buy the maximum quantity producers are prepared to sell as demand is higher than supply. As demand raises, equilibrium becomes disequilibrium as there is an excess in demand at the old equilibrium price. Market forces get rid of excess demand as price rises to where supply meets the new demand

Question 25

Joint supply

Answer 25

When the production of one good leads to the supply of a by-product from the same raw materials, for example a rise in production of beef, more cow slaughter, more cow hide and more supply of leather.

Question 26

Joint demand

Answer 26

If demand for a product increases then the demand for a complementary good of that product will also rise, however the opposite is true for a substitute good, if demand for a product rises the demand for the substitute good will fall.

Question 27

Composite demand

Answer 27

Demand for a good which has more than one use, meaning an increase in demand for one use of the good, reduces supply for the other use. For example raised demand for wheat as a biofuel causes less availability for wheat as a food

Question 28

Derived demand

Answer 28

Demand for a good or factor of production, wanted not for its own sake, but as a consequence of the demand for something else; more demand for cars will cause more demand for engines/gear boxes.