Section 2 - Price Determination in a competitive market

Question 1

Market

Answer 1

Any place or process that brings together buyers and sellers with a view of agreeing a price

Question 2

Demand

Answer 2

Amount that buyers are willing and able to purchase at a given price in a given time period

Question 3

Ceteris Paribus

Answer 3

Everything else held constant

Question 4

“Law of Demand”

Answer 4

More will be demanded as price falls

Question 5

Factors of demand

Answer 5

Things other than price which affect the demand causing the curve to shift

Question 6

PED

Answer 6

Measures the proportional responsiveness of demand to a change in price of a good

Question 7

YED

Answer 7

Measures the proportional responsiveness of demand to a change in consumers income

Question 8

XED

Answer 8

Measures the proportional responsiveness of the demand for a good to a change in price of another good

Question 9

Revenue

Answer 9

The income that a firm receives from a sale of a good or service to its customers

Question 10

Supply

Answer 10

The quantity of a good / service producers are willing and able to produce at a given price in a given time period

Question 11

Factors of supply

Answer 11

Things other than price which affect the supply causing the curve to shift

Question 12

PES

Answer 12

Measures the proportional responsiveness of the quantity supplied to a change in price

Question 13

Equilibrium

Answer 13

The price at which quantities demanded and supplied are equal

Question 14

Consumer surplus

Answer 14

The difference between how much buyers are willing to pay and what they actually pay

Question 15

Producer surplus

Answer 15

The difference between the market price and the lowest price at which the firm is prepared to supply

Question 16

Welfare economics

Answer 16

Optional allocation of resources/ goods and how this affects social welfare.

Question 17

Tax

Answer 17

Compulsory payment to the government

Question 18

Indirect taxes

Answer 18

Taxes on spending

Question 19

Specific Tax

Answer 19

A tax placed on a good/service which is a specific amount of money produced per unit bought

Question 20

Ad valorem Tax

Answer 20

A tax placed on a good/service which is a percentage of a price, e.g VAT

Question 21

Direct Taxes

Answer 21

Taxes on incomes

Question 22

Subsidy

Answer 22

A payment made to the producer by the government to encourage/ increase production and lower price

Question 23

Joint demand

Answer 23

When goods are demanded together e.g. printer and ink cartridges

Question 24

Composite demand

Answer 24

When the good demanded has more than one use e.g. milk

Question 25

Derived demand

Answer 25

When the demand for one good is linked to the demand for a related good e.g. labour

Question 26

Substitutes

Answer 26

A good that can demanded in place of another

Question 27

Joint Supply

Answer 27

increasing the supply of one good causes and increase/decrease in the supply of another good

Question 28

Minimum prices

Answer 28

Set above the equilibrium price and it would be illegal to sell below that price

Question 29

Maximum prices

Answer 29

The price is not allowed to rise above a certain level

Question 30

Surplus

Answer 30

When supply is greater than demand

Question 31

Shortage

Answer 31

When demand is greater than supply

Question 32

The price mechanism

Answer 32

The means by which decisions of consumers and businesses interact to determine the allocation of resources

Question 33

The invisible hand

Answer 33

Letting free markets do their thing

Question 34

Consumer sovereignty

Answer 34

The idea that it is consumers who influence production decisions

Question 35

Signalling function

Answer 35

Changes in price provide information to both producers and consumers about changes in market conditions

Question 36

Incentivising function

Answer 36

When the price of the product rises, quantity supplied increases as businesses respond

Question 37

Allocating function

Answer 37

Allocating scarce resources among competing uses

Question 38

Rationing function

Answer 38

When there is a shortage of a product, price will rise and deter some consumers from buying the product

Question 39

Static efficiency

Answer 39

Occurs when resources are allocated efficiently at one point in time

Question 40

Allocative efficiency

Answer 40

When the right amount of resources goes into the market

Question 41

Productive efficiency

Answer 41

When the optimal combination of inputs produce the maximum amount of output

Question 42

Dynamic efficiency

Answer 42

Resources are allocated efficiently over time

Question 43

Inferior goods

Answer 43

A good whose demand drops when people's incomes rise.

Question 44

Complements

Answer 44

A good whose use is related to the use of an associated or paired good e.g. the demand for one good (printers) generates demand for the other (ink cartridges).

Question 45

Dead-weight Loss

Answer 45

A cost to society created by market inefficiency

Question 46

Market Forces

Answer 46

refer to supply and demand, which determine the allocation of scarce resources and the relative prices of goods, services, and assets in a market economy.

Question 47

PED equation?

Answer 47

percentage change in quantity demanded / percentage change in price

Question 48

The price elasticity will usually be...

Answer 48

negative.

Question 49

DEMAND Perfectly Elastic? Elastic? Unit Elastic? Inelastic? Perfectly inelastic?

Answer 49

Infinity >1 =1 <1 0

Question 50

What are the 5 factors affecting PED?

Answer 50

Strength and number of substitutes; Luxuries/necessities; Addictive/Habit forming; Percentage of Income; Time period under consideration

Question 51

Demand is said to be inelastic when...

Answer 51

the percentage change in price exceeds the percentage change in quantity demanded of a good

Question 52

PES equation?

Answer 52

percentage change in the quantity supplied/ percentage change in the price

Question 53

SUPPLY Perfectly elastic? Elastic? Unit elastic? Inelastic? Perfectly inelastic?

Answer 53

Infinity >1 =1 <1 0

Question 54

What are the 6 factors affecting PES?

Answer 54

Length of the production period; The amount of spare capacity; Levels of stocks; Substitutabilty of Factors of Production; Time period/ time lags; Artificial barriers to supply e.g Patents

Question 55

XED Equation?

Answer 55

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