3. Price Determination in Competitive Markets (AQA A Level Economics): Flashcards

Inferior goods have an inverse relationship with income, so as income rises their demand falls, and vice versa.

As real income rises, the demand for a normal good increases.

Demand fell because of reduced disposable income from rising unemployment, changing preferences for safer dining, and government restrictions on indoor dining.

True.

Restaurant dining is a normal good, so its demand falls when consumer incomes fall during the pandemic downturn.

During the pandemic, the demand curve for restaurant dining shifted to the left.

A normal good is a good whose demand falls when consumer incomes fall and rises when incomes rise.

Quantity demanded fell from Q1 to Q2 while the price level remained the same at P1.

False.

It was caused by changes in the conditions of demand, which shifted the whole curve left while the price stayed at P1.

A change in tastes and preferences, as her music and concerts became more popular, increased demand at every price level.

The increased popularity of Taylor Swift's concerts shifted the demand curve to the right.

True.

An increase in demand shifts the whole curve right, so more tickets are demanded at each price, irrespective of the price level.

Quantity demanded rose from Q1 to Q2 as the demand curve shifted right.

Supply is the amount of a good or service that a producer is willing and able to supply at a given price in a given time period.

True.

There is a positive relationship between price and quantity supplied, so profit-maximising producers supply more as prices rise.

The law of supply states that there is a positive relationship between price and quantity supplied, ceteris paribus.

Market supply is calculated by adding up the individual supply of all producers at each price level.

The determinants of supply are the factors, other than price, that change the supply of a good or service and shift the entire supply curve.

False.

A change in price causes a movement along the supply curve (a change in quantity supplied), not a shift of the whole curve.

A contraction is a movement down the supply curve, where a fall in price causes quantity supplied to decrease.

An increase in price, ceteris paribus, causes an extension in quantity supplied.

Supply decreases and the supply curve shifts left, as the firm can afford to produce fewer products.

True.

A subsidy lowers a firm's costs of production, so supply increases and the curve shifts right.

Goods in competitive supply are goods a producer can make as alternatives, so increasing supply of one reduces supply of the other, such as a farmer growing wheat or potatoes.

A drought or flood can cause a supply shock in an agricultural market.

A decrease in supply is a leftward shift of the entire supply curve, so less is supplied at every price level.

Rising energy costs, caused by supply chain issues, raised the cost of operating greenhouses and reduced supply.

True.

The rise in production costs decreased supply, shifting the entire supply curve left from S1 to S2.

Rising energy prices raised the cost of operating greenhouses, reducing the supply of UK tomatoes.

Quantity supplied fell from Q1 to Q2 while the price remained the same at P1.

An increase in supply is a rightward shift of the entire supply curve, so more is supplied at every price level.

Advances in technology, including greater mechanisation and genetically modified food, raised productivity and output.

True.

Better technology increased productivity, raising supply and shifting the entire curve right from S1 to S2.

Greater mechanisation and innovations in genetically modified food increased lettuce output.

Quantity supplied rose from Q1 to Q2 while the price remained the same at P1.

A market is any place, physical or virtual, that brings buyers and sellers together to trade at an agreed price.

True.

When demand equals supply the market clears at the equilibrium price and quantity, satisfying both buyers and sellers.

At equilibrium, the price is called the equilibrium or market-clearing price.

A market is in disequilibrium whenever demand does not equal supply, creating either excess demand or excess supply.

Excess demand occurs when quantity demanded is greater than quantity supplied, creating a shortage in the market.

False.

Shortages arise when the price is below equilibrium; surpluses arise when the price is above equilibrium.

Sellers gradually raise prices, causing a contraction in quantity demanded and an extension in quantity supplied until the excess is cleared.

Excess supply is also described as a surplus in the market.

Excess supply occurs when quantity supplied is greater than quantity demanded, creating a surplus in the market.

True.

At $500 the quantity demanded equals the quantity supplied at 800 units, so the market clears.

It creates excess demand, because the lower price is more affordable so quantity demanded exceeds quantity supplied.

A demand and supply schedule shows the quantity demanded and quantity supplied at different price levels.

A dynamic market is a market whose conditions of demand and supply are constantly changing, causing the equilibrium price and quantity to shift frequently.

A change in a condition of demand or supply temporarily creates disequilibrium, which market forces then act to clear.

False.

An increase in demand raises the price, which causes an expansion of supply along the existing curve, not a shift of supply.

When demand for desks rose during Covid lockdowns, at the original price a condition of excess demand existed.

Excess demand is a shortage that occurs when the quantity demanded is greater than the quantity supplied at the current price.

Both the equilibrium price and equilibrium quantity of desks rose to a new, higher market equilibrium.

True.

The fall in supply created excess demand at the original price, so price rose while quantity fell.

A supply shock is a sudden, unexpected event that reduces supply, such as Hurricane Fiona destroying Puerto Rico's plantain crop.

Rising inflation reduced consumers' real income, so fewer luxuries such as lobster were bought, decreasing demand.

A decrease in demand for lobsters created a condition of excess supply at the original price.

True.

The subsidy shifts supply to the right, creating excess supply that pushes the price down and raises the equilibrium quantity.

The lobster price fell from $12.35 per pound on 1 April to $9.35 per pound on 1 May.

Excess supply is a surplus that occurs when the quantity supplied is greater than the quantity demanded at the current price.

Price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price.

PED equals the % change in quantity demanded divided by the % change in price.

False.

A PED between 0 and 1 means demand is relatively inelastic, as the % change in quantity demanded is less than proportional to the % change in price.

A PED value where the % change in quantity demanded exactly equals the % change in price is called unitary elasticity.

Demand is relatively inelastic when the % change in quantity demanded is less than proportional to the % change in price, giving a PED between 0 and 1.

PED = -60% ÷ 50% = -1.2, presented as 1.2 because the sign is ignored (relatively elastic).

True.

When demand is inelastic a price rise causes a less than proportional fall in quantity demanded, so total revenue increases.

It should lower its price, because the more than proportional rise in quantity demanded increases total revenue.

Demand is perfectly inelastic (PED = 0) when the quantity demanded is completely unresponsive to a change in price.

Good availability of substitutes results in a higher value of PED.

Availability of substitutes, addictiveness of the product, price as a proportion of income, and the time period.

True.

In the short term PED is lower (inelastic); over a longer period consumers find substitutes, so PED rises.

Demand is perfectly elastic (PED = ∞) when the quantity demanded falls to zero following any change in price.

Income elasticity of demand measures how responsive the quantity demanded of a good is to a change in consumer income.

YED equals the % change in quantity demanded divided by the % change in income.

True.

A negative YED means demand falls as income rises, which is the defining feature of an inferior good.

A normal good with a YED greater than 1 is income elastic.

An inferior good has a negative YED, so its demand decreases when consumer income increases.

YED = 25% ÷ 25% = 1, so the bagels have unitary income elasticity.

True.

Its demand rises with income but less than proportionally, so it is income inelastic.

Cross elasticity of demand measures how responsive the quantity demanded of good A is to a change in the price of good B.

A negative XED value indicates that the two goods are complements.

A positive XED value indicates that two goods are substitutes.

XED = 60% ÷ -33.3% = -1.8, showing the two goods are strong complements.

False.

An XED of zero means the goods are unrelated, with no relationship between them.

A normal good has a positive YED, so its demand increases when consumer income increases.

Price elasticity of supply measures how responsive the quantity supplied of a good is to a change in its price.

PES equals the % change in quantity supplied divided by the % change in price.

False.

A PES between 0 and 1 means supply is relatively inelastic, as the % change in quantity supplied is less than proportional to the % change in price.

When quantity supplied is completely unresponsive to a change in price, supply is perfectly inelastic.

Supply is relatively elastic when the % change in quantity supplied is more than proportional to the % change in price, giving a PES above 1.

PES = 9.1% ÷ 61% = 0.15, so avocados are very price inelastic in supply.

False.

The final PES answer should not be expressed as a percentage; doing so is a common error that loses marks.

Because it takes time to grow more avocados, so suppliers cannot quickly raise the quantity supplied when the price increases.

Spare capacity is unused productive capacity that lets firms raise output quickly when price rises, making supply more elastic.

If products can be easily stored, PES will be higher.

Mobility of the factors of production, the rate at which production costs rise, the ability to store goods, spare capacity, and the time period.

True.

In the short run it takes time to produce more, but in the long run firms can change all factors of production to raise output.

Supply is perfectly elastic (PES = ∞) when producers will supply an unlimited quantity at a particular price.

Joint demand occurs when two complementary goods are used together, so a change in the price of one affects the demand for the other.

Competitive demand describes substitute goods, which are used for the same purpose.

True.

With composite demand the goods share an input, so increased production of one can reduce the supply available for the other.

Two substitute goods used for the same purpose are said to be in competitive demand.

Joint supply occurs when the supply of two goods comes from the same source, so producing more of one increases the supply of the other, often as a by-product.

Beef and cow leather, where the leather is a by-product of producing beef.

False.

Cheese and yogurt share the input milk, so they are an example of composite demand.

Derived demand is when the demand for a good, such as an input, arises from the demand for another good or service.

The complement's entire demand curve shifts left, decreasing its demand at the original price.

An increase in demand for beef raises the price of beef and increases the supply of leather.

They are in joint demand, as they are complementary goods used together.

False.

A rise in the price of mobiles decreases the demand for the complementary mobile apps, shifting their demand curve left.

Composite demand occurs when two or more goods require the same input, so using more of that input for one reduces the supply available for the other.