2. Market Economy Flashcards
Define demand.
Demand is defined as the quantity of good or services that consumers are both willing and able to buy at each possible price during a given period of time, center is paribus.
What are the determinants of demand?
Taste and Preferences
Income of consumers
-Normal Good
-Inferior Good
Governments Policies
Change in Consumers’ Expectations
Change in the price of Related Goods
-Substitutes in Consumption
-Complements in Consumption
-Derived Demand
Seasonal factors
Interest rate/ ease of credit
Change in size and composition of population
Define Supply.
Supply is defined as the quantity of a good or service that producers are both willing and able to sell at each possible price in a given period of time, center is paribus.
What are the determinants of supply?
Technology
Input prices
Government policies
-Indirect tax(fixed tax, ad valorem tax)
-Subsidies
-Regulations
Expectation of Future Prices
Price of related goods
-Substitutes in Production
-Goods in joint supply
Number of sellers
Others
Describe the price adjusting process. (When demand increases)
Define consumer surplus.
The difference between the total amount consumers are willing to pay for a good or services and the total amount they actually paid.
Define producer surplus.
The difference between the total amount producers are prepared to receive for a good or services and the actually amount they actually received.
Outline the decision marking by consumers and producers (market analysis)
Consumers decide how much to consume by comparing their MPB derived and MPC incurred for each unit of good. As long as MPB > MPC rational consumers will consume up to that unit of good.
The MPB is depicted by the demand curve since it shows the maximum price consumers are willing and able to pay for each unit of the good. MPC is represented by the actual price paid by consumers for a unit of good. In the figure, since the equilibrium price is Pe, this implies that MPC = Pe.
For the Q1th unit, the MPB enjoyed by the consumer is P1. However, the MPC incurred is Pe. Since P1 > Pe, consumers will buy Q1th unit.
In fact, consumers will buy up to the point Qe since for all unites before Qe, the additional benefits surpass the additional costs.
It is however, irrational to consume beyond Qe as the additional costs surpass the additional benefits.
(Note: the explanation for RDM of producers are similar, MPB is the equilibrium price whereas MPC is the supply curve.)
