price determination in a competitive market

Question 1

What does a demand curve show?

Answer 1

A demand curve shows the relationship between price and quantity demanded.

Question 2

What causes a shift in the demand curve?

Answer 2

(A) Changes in income. (B) Consumer tastes. (C) Prices of substitutes or
complements. (D) Population changes. (E) Advertising.

Question 3

What is price elasticity of demand (PED)?

Answer 3

PED measures responsiveness of demand to a change in price.

Question 4

What is income elasticity of demand (YED)?

Answer 4

YED measures responsiveness of demand to a change in income.

Question 5

What is cross elasticity of demand (XED)?

Answer 5

XED measures responsiveness of demand for one good to a change in the price of
another.

Question 6

What is the formula for PED?

Answer 6

PED = % change in quantity demanded ÷ % change in price.

Question 7

What is the formula for YED?

Answer 7

YED = % change in quantity demanded ÷ % change in income.

Question 8

What is the formula for XED?

Answer 8

XED = % change in quantity demanded of good A ÷ % change in price of good B.

Question 9

What does a positive YED indicate?

Answer 9

A normal good.

Question 10

What does a negative YED indicate?

Answer 10

An inferior good.

Question 11

What does a positive XED indicate?

Answer 11

Substitute goods.

Question 12

What does a negative XED indicate?

Answer 12

Complementary goods.

Question 13

How does PED affect total revenue?

Answer 13

(A) Elastic demand: price increase reduces total revenue. (B) Inelastic demand: price
increase raises total revenue.

Question 14

What factors influence PED?

Answer 14

(A) Availability of substitutes. (B) Time. (C) Necessity vs luxury. (D) Habit-forming.
(E) Proportion of income.

Question 15

What factors influence YED?

Answer 15

(A) Income level. (B) Type of good. (C) Necessity or luxury.

Question 16

What factors influence XED?

Answer 16

(A) Strength of relationship. (B) Substitutability or complementarity.

Question 17

What does a supply curve show?

Answer 17

A supply curve shows the relationship between price and quantity supplied.

Question 18

Why do higher prices increase supply?

Answer 18

Higher prices imply higher profits, incentivising producers to supply more.

Question 19

What causes a shift in the supply curve?

Answer 19

(A) Changes in production costs. (B) Technology. (C) Taxes and subsidies. (D)
Weather. (E) Number of sellers.

Question 20

What is the shape of the supply curve under perfect competition?

Answer 20

The marginal cost curve.

Question 21

What is PES?

Answer 21

PES measures responsiveness of quantity supplied to a change in price.

Question 22

What is the formula for PES?

Answer 22

PES = % change in quantity supplied ÷ % change in price.

Question 23

What factors influence PES?

Answer 23

(A) Spare capacity. (B) Stock levels. (C) Production time. (D) Time period. (E)
Mobility of factors.

Question 24

What determines equilibrium market prices?

Answer 24

The interaction of demand and supply.

Question 25

What is market disequilibrium?

Answer 25

Disequilibrium is when demand does not equal supply.

Question 26

What causes excess demand?

Answer 26

Quantity demanded exceeds quantity supplied.

Question 27

What causes excess supply?

Answer 27

Quantity supplied exceeds quantity demanded.

Question 28

How does excess demand affect prices?

Answer 28

Excess demand causes prices to rise.

Question 29

How does excess supply affect prices?

Answer 29

Excess supply causes prices to fall.

Question 30

What is joint demand?

Answer 30

Joint demand is when goods are used together, like printers and ink.

Question 31

What is competitive demand?

Answer 31

Competitive demand is when goods are substitutes, like butter and margarine.

Question 32

What is composite demand?

Answer 32

Composite demand is when one good is demanded for multiple uses, like milk.

Question 33

What is derived demand?

Answer 33

Derived demand is when demand for one good is linked to another, like labour for products.

Question 34

What is joint supply?

Answer 34

Joint supply is when producing one good also produces another, like beef and leather.