Price Determination In A Competitive Market (Topic 3)

Question 1

What’s demand?

Answer 1

A willingness and ability to purchase a good/service at any point in time

Question 2

What’s the law of demand?

Answer 2

As the price of a good falls, the quantity demanded rises

Question 3

What’s supply?

Answer 3

The quantity of goods/services produced by a firm at any given price level

Question 4

What 4 factors affect the supply curve?

Answer 4

Weather changes
Changes in levels of taxation
Changes in the price of labour
Changes in the price of raw materials

Question 5

When does market equilibrium occur?

Answer 5

When market clearing price is achieved (supply = demand)

Question 6

What happens when the market is in disequilibrium?

Answer 6

The market shifts back to equilibrium automatically

Question 7

What’s price elasticity of demand?

Answer 7

A measure of the responsiveness of demand to changes in price

Question 8

How do you calculate PED?

Answer 8

%change in quantity demanded / %change in price

Question 9

When is PED elastic?

Answer 9

PED < -1

Question 10

When is PED unitary?

Answer 10

PED = -1

Question 11

When is PED inelastic?

Answer 11

PED > -1 + PED < 0

Question 12

What does a PED perfectly inelastic graph look like?

Answer 12

The quantity line never changes

Question 13

What does a PED perfectly elastic graph look like?

Answer 13

The quantity changes while the price doesn’t

Question 14

What does a PED unitary graph look like?

Answer 14

The quantity and price will be inversely proportionate

Question 15

What’s income elasticity of demand?

Answer 15

A measure of the responsiveness of demand to changes in income

Question 16

How is YED calculated?

Answer 16

%change in quantity / %change in income

Question 17

When is a good inferior?

Answer 17

YED < 0

Question 18

When is a good superior?

Answer 18

YED > 1

Question 19

When is a good normal?

Answer 19

YED > 0 + YED < 1

Question 20

What’s cross price elasticity?

Answer 20

A measure of the responsiveness of demand for good A to changes in price of good B

Question 21

How is XED calculated?

Answer 21

%change in A quantity / %change in B price

Question 22

When are two goods complimentary?

Answer 22

XED < 0

Question 23

When are two goods substitute?

Answer 23

XED > 1

Question 24

When are two goods responsive?

Answer 24

XED > 1 + XED < -1

Question 25

What does a substitute good graph look like?

Answer 25

Supply increases proportionally

Question 26

What does a complimentary good graph look like?

Answer 26

Supply increases negatively

Question 27

What 5 factors affect PED?

Answer 27

Type of good Availability of substitutes Income levels Time period Overall price level

Question 28

What happens to the supply curve in perfect competition?

Answer 28

The supply curve = the marginal cost curve

Question 29

What's price elasticity of supply?

Answer 29

A measure of the responsiveness of supply to changes in price

Question 30

How is PES calculated?

Answer 30

%change in quantity / %change in price

Question 31

When is supply unitary?

Answer 31

PES = 1

Question 32

When is supply elastic?

Answer 32

PES > 1

Question 33

When is supply inelastic?

Answer 33

PES > 0 + PES < 1

Question 34

What does an infinitely elastic supply curve look like?

Answer 34

The quantity changes whilst the price doesn't

Question 35

What does a perfectly inelastic supply curve look like?

Answer 35

The quantity never changes

Question 36

What's joint demand?

Answer 36

When two goods work together so it's necessary to purchase them together

Question 37

What're substitute goods?

Answer 37

Product's a consumer sees as the same/similar

Question 38

What's composite demand?

Answer 38

When a good is demanded for multiple uses

Question 39

What's derived demand?

Answer 39

When demand for a good is due to demand for another good

Question 40

What's joint supply?

Answer 40

When a product can yield two or more outputs