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PAPER 3 ECONOMICS > Price Determination in a Competitive Market > Flashcards

Price Determination in a Competitive Market Flashcards

1
Q

Demand?

A

The quantity of goods and services that consumers and willing and able to buy at given prices in a particular period of time

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2
Q

Effective Demand?

A

consumers’ desire to buy a good, backed by an ability to pay

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3
Q

LAW OF DEMAND

A
  • as price falls, quantity demanded rises

- inverse relationship

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4
Q

Extension in demand?

A
  • increase in quantity demanded from a fall in price
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5
Q

Contraction in demand?

A

decrease in quantity demanded from a rise in price

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6
Q

Shifts of Demand curve?

A

1) real disposable income (incomes after effects of inflation, taxation and benefits)
2) Tastes and preferences
3) Population
4) Price of Substitutes
5) Price of Compliments

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7
Q

Substitutes?

A

goods that may be consumed as an alternative to another good (competitive demand)

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8
Q

Complimenta?

A

goods tend to be consumed with another good = joint demand

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9
Q

Price Elasticity of demand?

A

responsiveness of quantity demanded of a good or service to a change in price

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10
Q

PED Equation:

A

percentage change in quantity demanded/ percentage change in price

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11
Q

price INELASTIC demand

A
  • value of PED between 0 and 1

- change in price leads to a smaller percentage change in quantity demanded

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12
Q

price ELASTIC demand

A
  • value of PED > 1

- change in price leads to a larger percentage change in quantity demanded

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13
Q

unitary ELASTIC demand

A
  • value of PED = 1

- change in change in price has led to the same percentage change in quantity demanded

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14
Q

perfectly INELASTIC demand

A
  • value of PED = 0

- change in price has led to no change in quantity demanded

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15
Q

perfectly INELASTIC demand

A
  • value of PED = infinity

- change in price has led to an infinitely larger change in quantity demanded

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16
Q

PED AND TR:

if demand is price INELASTIC (fall in price)

A
  • fall in total revenue
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17
Q

PED AND TR:

if demand is price ELASTIC (fall in price)

A
  • rise in total revenue
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18
Q

PED AND TR:

if demand is price INELASTIC (rise in price)

A
  • rise in total revenue
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19
Q

PED AND TR:

if demand is price ELASTIC (rise in price)

A
  • fall in total revenue
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20
Q

Determinants of PED:

A

1) Many close subs - many = elastic
2) Percentage of income spent on product- if accounts for large percentage of consumer income = elastic
3) Nature of the product = necessity or has addictive qualities = inelastic
4) Time period- short run = inelastic

21
Q

Income Elasticity of Demand:

A

measures the responsiveness of demand to a change in real income

22
Q

YED Equation:

A

percentage change in quantity demanded/ percentage change in real income

23
Q

if the value of YED is positive:

A

Normal good = rise in income leads to an increase in demand

24
Q

if the value of YED is negative:

A

Inferior good = rise in income leads to fall in demadn

25
Q

income ELASTIC demand:

A
  • value of YED is > +1
  • increase in real income has led to a greater percentage increase in demand
  • referred to as luxury goods
26
Q

income INELASTIC demand:

A
  • value of YED between 0 and +1
  • increase in real income has led to a smaller percentage increase in demand
  • referred to as basic goods
27
Q

Negative income elasticity:

A
  • value of YED is negative i.e less than 0
  • increase in income has led to a fall in demand
  • referred to as inferior goods
28
Q

cross elasticity of demand?

A

measures the responsiveness of the demand for a product following a change in the price of another product

29
Q

XED Equation?

A

percentage change in quantity demanded of product A/ percentage change in price of product B

30
Q

if the value of XED is positive?

A

substitutes

- rise in the price of B leads to a rise in demand for A

31
Q

if the value of XED is negative?

A

compliments

-rise in price of product B leads to fall in demand for A

32
Q

SUPPLY?

A

the quantity of a good or service that firms plan to sell at given prices in a particular time period

33
Q

LAW OF SUPPLY:

A
  • as price rises, quantity supplied rises
  • +ve relationship due to profit motive
  • firms want to maximize profit therefore higher prices give firms incentive for firms to increase production
34
Q

shifts of supply curve?

A

1) Production costs
2) Productivity of Labour
3) Taxes on businesses
4) Production subsidies
5) Technlogy

35
Q

Price Elasticity of Supply?

A

measures the responsiveness of quantity supplied of a good or service to a change in price

36
Q

PES Equation:

A

percentage change in quantity supplied / percentage change in price

37
Q

price INELASTIC supply:

A
  • value of PES is between 0 and 1

- change in price has led to a smaller percentage change in quantity supplied

38
Q

price ELASTIC supply:

A
  • value of PES > 1

- change in price has led to a greater percentage change in quantity supplied

39
Q

unitary ELASTIC supply:

A
  • value of PES = 1

- change in price has led to the same change in quantity supplied

40
Q

perfectly INELASTIC supply:

A
  • value of PES = 0

- change in price has led to no change in quantity supplied

41
Q

perfectly ELASTIC supply:

A
  • value of PES = infinity

- change in price has led to an infinitely larger change in quantity supplied

42
Q

Determinants of PES

A

1) Time taken to expand supply- longer = inelastic
2) Size of spare capacity- more can expand production = elastic
3) Available stocks- firms with stocks of finished goods respond quick to rise in price = elastic
4) Ease of switching products- = more elastic

43
Q

Excess supply?

A
  • occurs if price above the market equilibrium
  • firms forced to reduce prices
  • contraction in supply, extension in demand
  • eliminates excess supply + restores equilibrium
44
Q

Excess demand?

A
  • occurs if price below market equilibrium
  • firms increase prices
  • extension in supply, contraction in demand
  • eliminates excess demand + restores equilibrium
45
Q

Joint demand?

A

goods that tend to be demanded together- as demand for one increases, so does demand for the other

46
Q

Joint supply?

A

when production of one good leads to production of another good

47
Q

Composite demand?

A

when a good is demanded for more than one distinct use- increase in demand for one use reduces supply available for others

48
Q

Derived demand?

A

when a particular good or FoP is necessary for the provision of another good or service

PAPER 3 ECONOMICS (10 decks)

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