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Economics Micro > Yr1 Price Determination in a Competitive Market > Flashcards

Yr1 Price Determination in a Competitive Market Flashcards

1
Q

PART 1

A

THE DETERMINATION OF THE DEAMDN FOR GOODS AND SERVICES

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2
Q

What’s the definition of demand?

A

The quantity of a good or service that buyers would wish (willing and able) to purchase at each conceivable price

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3
Q

What does the law of demand state?

A

The law of demand states there is an inverse relationship between quantity demanded and the price of a good or service (ceteris paribus)

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4
Q

What does ceteris paribus mean?

A

All other factors stay the same (are constant)

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5
Q

What does a change in prices cause on the demand curve?

A

Movement ALONG the demand curve

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6
Q
  1. If the price increases on the demand curve, what happens to the demand curve?
  2. Vice versa with price decrease
A
  1. Contraction in demand
  2. Extension in demand
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7
Q

On the demand curve, are supply and demand inversely proportional or proportional?

A

Inversely proportional

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8
Q

What is the acronym for causes in shifts in the demand curve?

A

PIRATES

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9
Q

What does PIRATES stand for in terms of demand and the causes of the shifts in demand?

A

Population
Income
Related goods (substitutes/ complements)
Advertising
Tastes and fashions
Expectations of future price changes
Seasons

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10
Q

PART 2

A

PRICE, INCOME AND CROSS PRICE ELASTICITY OF DEMAND

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11
Q

What is the definition of PED?

A

The responsiveness of the quantity demanded of a product to a change in its price

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12
Q

What is the formula for PED + what does he number reveal about the product + diagram

A

PED = (% change Qd)/ (%change P)

Where Qd > P - elastic + shallow demand curve

Where Qd < P - inelastic + steep demand curve

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13
Q

What are the determinants of PED elasticity?

A
  1. The number and availability of substitutes
  2. Marketing in general, and branding and advertising
  3. Proportion of income spent on the product
  4. The degree of habit
  5. The time period
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14
Q

What is the definition of income elasticity of demand? (YED)

A

The responsiveness of demand to changes in income

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15
Q

What happens to a
1. Normal good
2. Inferior good
as incomes rise

Also which way does the demand curve slope?

A
  1. Demand rises + curve slopes upwards
  2. Demand falls + curve downwards sloping
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16
Q

What is the YED formula + what do the results mean?

A

(% change in Qd) / (% change in income)

+ means normal good
- means inferior good

Elastic > 1
Inelastic 0 < YED < 1

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17
Q

What is the definition of cross elasticity of demand (XED)?

A

The responsiveness of demand of one goods to changes in the price of a related good > either a complement or a substitute

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18
Q

What is the XED formula? Interpret the result

A

% change in Qd of good X / % change in price of good Y

+ means substitute (positive relationship)

  • means complement (inverse relationship)
19
Q

XED BUSINESS SIGNIFICANCE
1. If goods are a complement
2. If goods are a substitute

A

1.
- businesses could ‘bundle’ them together and sell as a package
- takeover businesses that sell complements/ works closely with them

    • businesses may use brand proliferation to weaken the degree of suitability
    • engage in heavy advertising or price wars
20
Q

What is the importance of elasticity? (4)

A
  1. Relationships between changes in price and total revenue
  2. Influences the behaviour of a firm
  3. Importance of determining what goods to tax
  4. Importance of analysing time lags in production
21
Q

What are the key factors of elasticity? (5)

A
  1. The number of close substitutes available for consumers
  2. Price of product in relation to total income
  3. Cost of substituting between different products
  4. Brand loyalty and habitual consumption
  5. Degree of necessity/luxury
22
Q

Inelastic products

  1. What makes it one of them
  2. Show the correlation between price and revenue
A
    • no substitutes
    • good customer perception
    • doesn’t vary depending on income
    • high brand loyalty
    • incr price > incr revenue
    • decr price > decr revenue

Positive correlation

23
Q

Elastic products

  1. What makes it one of them
  2. What’s the relationship between price and revenue
A
    • lots of substitutes
    • varies depending on peoples income
    • lack of brand loyalty
    • decr price > incr renvue
    • incr price > decr revenue

Inverse relationship

24
Q

PART 3

A

THE DETERMINANTS OF THE SUPPLY OF GOODS ANS SERVICES

25
Q

What is the definition of supply?

A

The quantity of a good that sellers wish (willing and able) to sell at each possible price

26
Q

How does incentive link to supply?

A

Businesses wont supply goods unless the price is high enough to provide INCENTIVE (profit motive)

> produce more lucrative goods

27
Q

What is the acronym for causes in shifts in the supply curve?

A

PINTS WC

28
Q

What does PINTS WC stand for when linked to the causations of shifts in the supply curve?

A

Productivity improvements
Indirect taxes
Number of firms (competition)
Technology (improvements)
Subsidy (payments to firms > usually gov to incr production)

Weather
Cost of Production

29
Q

What direction does the supply curve travel in?

A

Horizontally upwards

30
Q

What is the relationship between price and quantity in the supply curve?

A

Proportional > positive correlation

31
Q
  1. Direction of a positive shift in supply
  2. Negative
A
  1. Right
  2. Left
32
Q
  1. What does a positive shift in the supply curve mean?
  2. Negative shift (vice versa)
A
  1. Incr supply
    Incr quantity
    Incr price
  2. Decr supply
    Decr quantity
    Decr price
33
Q

PART 4

A

PRICE ELASTICITY OF SUPPLY

34
Q

PES

  1. Definition
  2. Equation
  3. What >1, >1 and =1 mean in the answer to the equation
  4. What does it mean when PES equals 0 or ♾️
A
  1. Measures how responsive supply is to a change in price
  2. % change Qs/ % change P
  3. < 1 inelastic
    > 1 elastic
    = 1 unitary
  4. 0 = perfectly inelastic
    ♾️ = perfectly elastic
35
Q

What are the 6 factors determining PES?

A
  1. Length of production period
  2. Availability of spare capacity
  3. Ease of accumulating socks
  4. Ease of switching between alternative methods of production
  5. Number of firms in the market + ease of entering the market
  6. Time
36
Q

What does SATS stand for when linking to factors determining PES?

A

Spare capacity
Availability of FofP
Time
Stock availability

37
Q

What happens with each factor of production when price is inelastic supply and when price is elastic supply
1. Spare capacity
2. Stock availability
3. Time
4. Availability of FofP

A
  1. Inelastic > full capacity
    Elastic > spare capacity
  2. Inelastic > low level stocks, no surplus, goods to sell
    Elastic > stocks available
  3. Inelastic > short run as fixed capital, have to do innovation to improve technology long term elastic > varied capital long term
  4. Inelastic > resources already maximised + finite resources e.g. highly skilled workers
    Elastic > easy to employ more FofP
38
Q

PART 5

A

THE DETERMINATIONS OF EQUILIBRIUM MARKET PRICES

39
Q

PART 6

A

THE INTERRELATIONS BETWEEN MARKETS

40
Q

What is the definition of joint supply?

A

When one good is produced, another good is also produced from the same raw materials

41
Q

What is competing supply?

A

When raw materials are used to produce one good, they cannot be used to produce another good

42
Q

What is composite demand?

A

Demand for a good which has more than one use

43
Q

What is derived demand?

A

Demand for a good which is an input into the production of another good

44
Q

In the market interrelationships diagram, what part is consumer surplus and which part is producer surplus?

A

Top triangle > consumer surplus

Bottom triangle > producer surplus

Economics Micro (6 decks)

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