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Economics MICRO > Price Determination In A Competitive Market > Flashcards

Price Determination In A Competitive Market Flashcards

(58 cards)

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1
Q

What is Demand?

A

The quantity that producers are willing and able to buy at a given price and time period.

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2
Q

What is the law of demand?

A

Demand and supply have an inverse relationship

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3
Q

What causes an extension of the demand curve?

A

A fall in market price.

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4
Q

What causes a contraction of the demand curve

A

A rise in market price.

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5
Q

How does the substitution effect determine the demand for a good or service?

A

Decreased price becomes more attractive to consumers compared to similar products.

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6
Q

How does the income effect determine the demand for a good or service?

A

Decreased price gives the consumer more purchasing power allowing them to buy more of the same product.

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7
Q

How does the Diminishing Marginal Utility determine the demand for a good or service?

A

As consumers buy more of one product, their satisfaction from each additional unit decreases creating the downward sloping demand curve.

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8
Q

What is Effective Demand?

A

Demand that is backed up with the ability to pay for a good or service (e.g. bread).

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9
Q

What is Potential (latent) Demand?

A

Demand that is not expressed in the market yet as consumers do not have the ability to pay for it (e.g. yatch in Monaco)

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10
Q

What is Derived Demand?

A

Demand for a factor of production (CELL) that is used to produce another good or service.
(e.g. tyres for a car)

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11
Q

What is Joint Demand?

A

When demand for one product is directly and positively related to market demand for a related good or service. They are interdependent.
( e.g ink and printers)

Known as complements

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12
Q

What is Composite Demand?

A

Demand for a good that has multiple uses. (e.g. milk which can be used for cheese, yoghurt)

Can lead to pareto effect.

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13
Q

Causes for shifts in the demand curve

A

PASIFIC

P opulation
A dvertising
S ubstitiutes
I ncomes
F ashion/trends
I nterest rates
C omplements

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14
Q

What is Price Elasticity of Demand?

A

Measures the responsiveness of the quantity demanded for a good or service to changes in its price.

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15
Q

What is the formula for PED?

A

% change in quantity demanded / % change in price

Answer should retain [-] in an exam

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16
Q

If PED = 0 what does that mean?

A

Demand is Perfectly Price Inelastic

There is no change to price when there is a change in demand.

E.g Healthcare in the USA

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17
Q

If PED < 1 what does that mean?

A

Demand is Price Inelastic

There is little response to price change

E.g. Goods sold by monopolies

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18
Q

If PED > 1 what does that mean?

A

Demand is Price Elastic

There is significant response to price changes

E.g Luxury goods/ Airline tickets/ Fast Food

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19
Q

If PED = infinity what does that mean?

A

Demand is Perfectly Price Elastic.

Infinite percentage change in quantity to change in price

THEORETICAL

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20
Q

If PED = 1 what does that mean?

A

Demand is unit elastic

The quantity demanded changes by the same percentage as the change in price

E.g Petrol

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21
Q

What are the key factors affecting PED?

A

SPLAT

S ubstitutes (no.)
P ercentage of income
L uxury or necessity
A ddictive/Habit forming
T ime period (to find substitute)

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22
Q

What is the relationship between PED and total revenue?

A

E lastic
O pposite
I nelastic
S ame

Price increases then revenue will either increase (if inelastic) or decrease (if elastic)

Vice Versa

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23
Q

What is Cross Elasticity of Demand?

A

Measures the responsiveness of the quantity demanded of one good with a change in price of another.

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24
Q

What is the formula of XED?

Study These Flashcards
A

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

25
If XED >1 what does this mean?
Demand between the goods is price elastic (strongly related)
26
If XED <1 what does this mean?
Demand between the goods is price inelastic (weakly related)
27
If XED = 0 what does this mean?
Demand for goods is perfectly price inelastic (No relation)
28
If XED is positive what does this mean?
The goods are substitutes
29
If XED is negative what does this mean?
The goods are complements
30
What is Income Elasticity of Demand?
Measures the responsiveness of quantity demanded given to a change in income.
31
What is the formula of YED?
% change in quantity demanded for X / % change in real income
32
If YED < 0 what does this mean?
The good is an inferior good.
33
If 0< YED < 1 what does this mean?
Demand is income inelastic. (Normal necessity)
34
If YED >1 what does this mean?
Demand is income elastic (Normal Luxury)
35
If YED is positive what does this mean?
The good is a Normal Good
36
If YED is negative what does this mean?
The good is a Inferior Good.
37
What is the difference between luxury goods and normal goods?
Normal goods are when demand for a good increases with rises in income Luxury goods are when demand for a good increases faster than income.
38
What are Inferior goods?
If less of the good is purchased when there is a rise in real incomes then the good is inferior. Their demand varies inversely to the economic cycle.
39
Why is YED important for businesses
Allows then to estimate changes to demand of their products based on income fluctuations. Luxury - high income elasticity and see greater sales volatility Higher value products increase profit margins due to high YED and low PED
40
What is Supply?
The quantity of a good or service that producers are willing and able to supply at a given price and time.
41
What is the law of supply?
As the price of a product rises, businesses expand supply creating higher process which provide profit incentives for businesses.
42
What is the profit motive?
A powerful incentive for suppliers to expand production (output) when there is an increase in market price to earn higher profits.
43
What are some non-price factors that can affect supply?
Productivity Indirect tax Competition Technology Subsidies Cost of Production Weather Exchange rate
44
What is the Price Elasticity of Supply?
Measures the responsiveness of the quantity supplied of a good or service to changes in its price.
45
What is the formula for PES?
% change in quantity supplied / % change in price
46
If PES = 0 what does that mean?
Supply is Perfectly Price Inelastic Businesses will not change supply in response to changes in price.
47
If PED < 1 what does that mean?
Supply is Price Inelastic If price rises then supply will increase but at a lesser proportional increase in price
48
If PED = 1 what does that mean?
Supply is Perfectly Price Elastic Businesses will proportionally change supply in response to price fluctuations
49
If PED > 1 what does that mean?
Supply is Price Elastic If price rises, supply will increase but at a greater proportional to price.
50
What are the factors affecting PES?
Time (to react) Spare capacity Production lag Stock of raw materials (perishable goods) Substitutability of CELL (reallocate)
51
What are Free Markets?
Any place where buyers meet suppliers to exchange goods and services free from government intervention.
52
What is Market Equilibrium?
When forces of supply and demand are equal and in balance leading to stability in prices and quantities exchanged in the market.
53
What is the Price Mechanism?
Prices Rise and Fall depending on SIRA S ignal excess demand or supply and need for more or less resources I ncentivise firms to increase or decrease output R ation resources by increasing or decreasing consumption A llocate resources efficiently at equilibrium.
54
What is Excess Demand?
Excess demand causes the price to be forces up, demand to contract and supply to extend
55
What is Excess Supply?
Excess supply causes the price to be forced down, demand to extend and supply to extend.
56
What is Consumer Surplus?
The difference between the price consumer are willing and to pay and the price they actually pay
57
What is Producer Surplus?
The difference between the price producers are willing and able to supply and the price they actually receive
58
Where is the consumer surplus and producer surplus on a Supply Demand graph?
Consumer Surplus is the area under the demand curve and current market price. Producer Surplus is the area under the supply curve and below the current market price.

Economics MICRO (3 decks)

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