Price determination

Question 1

Demand

Answer 1

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

Question 2

Factors influencing demand

Answer 2

• Population
• Income
• Related goods
• Advertising
• Trends
• Expectations
• Seasons

Question 3

Price elasticity of demand

Answer 3

The responsiveness of a change in demand to a change in price

Question 4

Elastic good

Answer 4

PED > 1

Question 5

Inelastic good

Answer 5

PED < 1

Question 6

Unitary good

Answer 6

PED = 1

Question 7

Perfectly inelastic good

Answer 7

PED = 0

Question 8

Perfectly elastic good

Answer 8

PED = infinity

Question 9

Factors influencing PED

Answer 9

• Necessity (more inelastic)
• Substitutes (more elastic)
• Addictiveness (more inelastic)
• Durability (more elastic)
• Peak demand (more inelastic)

Question 10

Total revenue

Answer 10

• If the PED is inelastic, increasing price increases total revenue
• If the PED is elastic, increasing price decreases total revenue

Question 11

Tax burden from indirect taxation

Answer 11

• If demand is inelastic the consumer bears most of the tax burden
• If demand is elastic the producer bears most of the tax burden

Question 12

Gain from subsidies

Answer 12

• If demand is inelastic, the consumer gains most of the benefit (through a bigger fall in price)
• If demand is elastic, the producer gains most of the benefit (through a bigger rise in revenue/output)

Question 13

Income elasticity of demand

Answer 13

The responsiveness of a change in demand to a change in income

Question 14

Inferior goods

Answer 14

• Demand falls as income increases
• YED < 0

Question 15

Normal goods

Answer 15

• Demand increases as income increases
• YED > 0

Question 16

Luxury goods

Answer 16

• Demand increases even more than the increase in income
• YED > 1

Question 17

Cross elasticity of demand

Answer 17

The responsiveness of a change in demand of one good, to a change in price of another good

Question 18

Complimentary good

Answer 18

• If the price of 1 good falls, quantity demanded for both will fall
• XED < 0

Question 19

Substitute goods

Answer 19

• If the price of 1 good increases, quantity demand for the other also increases

Question 20

Supply

Answer 20

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

Question 21

Factors influencing supply

Answer 21

• Productivity (outward shift)
• Indirect taxes/subsidies (inward/outward shift)
• Technology (outward shift)
• Costs of production

Question 22

Price elasticity of supply

Answer 22

The responsiveness of a change in supply to a change in price

Question 23

Elastic supply

Answer 23

• Firms can increase supply quickly at little cost
• PES > 1

Question 24

Inelastic supply

Answer 24

• It is expensive or takes a long time to increase supply
• PES < 1

Question 25

Perfectly elastic supply

Answer 25

- Any quantity demanded can be met without changing price - PES = infinity

Question 26

Perfectly inelastic supply

Answer 26

- Supply is fixed - PES = 0

Question 27

Factors influencing PES

Answer 27

- Time scale (supply is more inelastic in the short run) - Spare capacity (at full capacity a firm cannot easily increase supply) - Level of stock (high levels of stock make supply more elastic) - Barriers to entry - Substituable factors

Question 28

Market clearing price

Answer 28

The price at market equilibrium where the price has no tendency to change

Question 29

Excess demand

Answer 29

- Demand > supply at the current price, occurring below the equilibrium - There is a shortage so prices rise as firms responds to unmet demand

Question 30

Excess supply

Answer 30

- Supply > demand at the current price, occurring above the equilibrium - Prices fall as firms try to clear excess stock

Question 31

Derived demand

Answer 31

The demand for 1 good is linked to the demand for a related good

Question 32

Composite demand

Answer 32

Where the good demanded has more than one use

Question 33

Joint demand

Answer 33

Where goods are bought together

Question 34

Joint supply

Answer 34

Increasing the supply of 1 good causes an increase or decrease in the supply of another good