Senior Five Term 1 Topic 2/2: Price Theory Flashcards

Flashcards covering the vocabulary and core concepts of Price Theory for Senior Five Term 1 Topic 2/2, including market structures, demand and supply dynamics, price determination, and elasticity.

Market

Any arrangement where buyers and sellers come together to exchange goods and services, either physically or virtually.

Price theory

The study of how the value of goods and services is expressed in monetary terms and how supply and demand interact to set prices, influencing resource allocation.

Market equilibrium

The point where the quantity and price of a good or service are stable because supply equals demand.

Price

The monetary value assigned to a good, service, or resource, or the amount of money given up to obtain a commodity in a given market at a given time.

Perfect Competition

A market structure with many sellers, homogeneous products, no individual price control, and perfect resource mobility and knowledge.

Monopoly

A market structure with a single seller of a unique product with no close substitutes, often characterized by high barriers to entry.

Monopolistic Competition

A market structure with many sellers offering differentiated products through branding and features, often involving high advertising costs.

Oligopoly

A market dominated by a small number of large sellers whose decisions regarding price and output are interdependent.

Cost-plus pricing

A method where producers set prices by adding a profit margin to the total production costs.

Discriminatory pricing

Charging different prices for the same product in different markets, such as different electricity tariffs or airline tickets.

Auction method

A price determination mechanism where prices are set through bidding, commonly used in real estate or art.

Bargaining method

A price determination process where the final price is negotiated between the buyer and the seller.

Administered pricing

Prices set by government agencies or large firms rather than by the market forces of supply and demand.

Price leadership

When a large, low-cost firm with a significant market share fixes the price of a commodity, and smaller firms follow that lead.

Resale price maintenance

A practice where the manufacturer fixes the price at which retailers must sell a commodity to final consumers.

Demand

The quantity of a good or service consumers are willing and able to purchase at different prices during a specific period.

Quantity demanded

The specific amount of a good or service consumers are willing and able to buy at a given price during a particular period.

Demand curve

A graphical representation showing the inverse relationship between the price of a good and the quantity demanded.

Substitution effect

The tendency of consumers to switch to a good that has become relatively cheaper compared to its substitutes when its price falls.

Income effect

The change in consumption resulting from a fall in price, which increases a consumer's real income or purchasing power.

Diminishing marginal utility

The economic principle that each additional unit of a good consumed provides less satisfaction than the previous unit.

Joint (complementary) demand

When two or more goods are required together to satisfy a need, such as cars and fuel or guns and bullets.

Composite demand

Demand for a good that has multiple uses, such as electricity being used for lighting, heating, and machinery.

Derived demand

Demand for a good that is needed to produce other goods, such as the demand for steel to manufacture cars.

Independent (unrelated) demand

Demand for commodities that are not related, where the demand for one does not affect the demand for the other.

Aggregate demand

The total demand for final goods and services in an economy, expressed as $AD = C + I + G + (X - M)$.

Abnormal demand curve

A demand curve that violates the law of demand, typically showing demand increasing as price rises.

Giffen goods

Staple, inferior goods for which demand may fall when the price falls because consumers can then afford better substitutes.

Veblen effect

Conspicuous consumption where luxury goods are demanded more at higher prices to signal prestige or status.

Speculative demand

When rising prices attract more buyers who hope for further gains, common in stock or property markets.

Theory of supply

The principle that, all other factors being equal, an increase in the price of a good leads to an increase in the quantity supplied.

Supply curve

A graphical representation showing the positive relationship between the price of a good and the quantity producers are willing to sell.

Supply schedule

A numerical table showing the relationship between price and the quantity producers are willing to offer for sale.

Gestation period

The time it takes for a commodity to be produced and made ready for the market.

Joint supply

When two or more goods are produced simultaneously from the same resource, such as petrol and diesel from crude oil.

Competitive supply

A situation where the supply of one commodity leads to a reduction in the supply of another, like increasing beef supply at the expense of milk.

Market price

The prevailing price in the market at any given time, regardless of whether quantity demanded equals quantity supplied.

Normal (natural) price

The long-run equilibrium price established in a market after a series of price fluctuations.

Reserve price

The minimum price set by a seller below which they are unwilling to sell their commodity.

Reserve wage

The minimum wage set by a worker below which they are not willing to offer their services.

Price elasticity of demand (PED)

A measure of the responsiveness of quantity demanded to a change in the price of the commodity.

Cross elasticity of demand (XED)

A measure of the responsiveness of quantity demanded for one good (Y) to a change in the price of a related good (X).

Income elasticity of demand (YED)

A measure of the degree of responsiveness of demand for a commodity to a change in consumer income.

Consumer surplus

The difference between the maximum amount a consumer is willing to pay and the actual equilibrium price they pay.

Producer surplus

The difference between the amount a producer actually receives and the minimum amount they would be willing to accept.

Transfer earning

The minimum payment required to keep a factor of production in its current employment or occupation.

Economic rent

The payment made to a factor of production that is over and above its transfer earning or supply price.

Quasi-Rent

A surplus earned by a factor of production whose supply is inelastic in the short run but elastic in the long run.

Price mechanism

The process by which prices in a free market automatically adjust to balance supply and demand without central planning.

Price ceiling

A government-imposed maximum price set below the market equilibrium level to protect consumers from high costs.

Price floor

A government-imposed minimum price set above the market equilibrium to protect producers from low returns, such as a minimum wage.

Cobweb theory

An economic theory explaining price fluctuations in agricultural products where current prices influence future production.

Utility

The satisfaction or benefit derived from consuming a given commodity.

Marginal utility

The additional satisfaction gained from consuming one extra unit of a commodity.

Cardinal Utility Theory

A theory assuming that the satisfaction a consumer derives from goods can be measured in absolute units called utils.

Utils

Absolute units used to numerically quantify utility in Cardinal Utility Theory.

Engel curve

A curve showing the relationship between a consumer's income and the quantity of a good they purchase, holding prices constant.