2.1 - Introduction to competitive markets Flashcards
SHIFT/MOVEMENT
Shift - when price doesnt change but quantity changes
movement - when price changes and so does quantity
Market
Market is any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange.
Product/Resource markets
Product - Goods and services
Resource - (Factors of production) are sold in resource (factor) markets.
Market Power
Control a seller may have over price. If the price of the product it sells. The greater the market power, the greater is the control over price. On the other hand, the greater the degree of competition between sellers, the smaller the market power and weaker is their control over the price.
Competitive Markets
Composed of large numbers of sellers and buyers acting independently, so that no one individual seller or small group of sellers has the ability to control the price of the product sold.
Demand
The demand of an individual consumer indicates the various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.
Willing
willing means the consumer wants to buy the good:
‘able’ means that the consumer can afford to buy it.
Willing doesn’t increase the demand
Ceteris Paribus
All things other than price that can affect how much the consumer is willing and able to buy are assumed to be constant and unchanging.
The law of demand
As the price of good falls, the quantity of good demanded increases. ‘Negative’ or ‘indirect’ relationship
Market Demand
Sum of all individual demands for a good.
Rightward shift
Indicates that more is demanded for a given price –> increase in demand
Leftward Shift
Indicates that less is demanded for a given price. Decrease in demand.
Price constant, demand changes (SHIFT)
When price remains constant, even though there is a change in the quantity demanded then in that case there is a shift. The rightward shift is when demand increases, leftward shift is when demand decreases.
Non-price determinants
1. Income in case of normal goods
2. Income in case of inferior goods
3. Preferences and tastes
4. Prices of substitute goods
Income in case of normal goods
When income increases the case of normal goods. If income increases, rightward shift. If income decreases, leftward shift.
Income in the case of inferior goods
While goods are normal, there are some goods where the demand falls as consumer income increases:
The good is then an inferior good (the demand for good varies inversely with income).
Example: second hand cars, clothes, bus tickets.
Increase in income leads to a leftward shift in demand curve and a decrease in income produces a rightward shift.
Preferences and tastes
change in favour of product –> demand increases, shift to right
change against product –> demand decreases, shift to left
Prices of substitute goods
Directly related (Coca Cola price increases, Pepsi demand increases)
Prices of complimentary goods
Two goods are complements (complementary goods) if they tend to be used together. An example of complementary goods is computer and computer software.
So if the price of game consoles decreases then demand for video game increases.
The number of consumers/increase in population
if the number of consumers increases, demand increases, shift towards right.
If the number of consumers decreases, demand decreases, shift towards left.
Movements along a demand curve shifts off the demand curve.
Price changes it leads to a movement along the demand curve.
Price remains same then its a shift.
Assumptions underlying the law of demand
The law of diminishing marginal utility –> negative relationship between price and quantity demanded, or law of demand.
Utility - satisfaction of consumers
Total Utility and Marginal Utility
Total Utility - total satisfaction that consumers get from consuming something.
Marginal utility - is the extra satisfaction that consumers receive from consuming one more unit of a good.
Marginal Utility
Keeps decreasing and at some point may even become negative, meaning total utility starts to fall. based on idea that satisfaction consumers get from consuming more and more units of a good decreases.
Law of diminishing marginal utility
Consumption of a good increases, marginal utility or extra utility receives, decreases with each additional unit consumed. Shows law of demand which means that the consumer will only be ready to buy each additional unit of a good if price falls.
Substitution effect
If the price of a good falls the consumer substitutes (buys more) of the now less expensive good. Therefore, quantity demanded increases. Always a negative relationship between price and quantity demanded as a result of the substitution effect: as price falls, the quantity of the good demanded increases; as price increases, quantity demanded falls
Income effect
If the prices fall, the purchasing power of the customer increases. Which means the pencil that used to cost $4 now costs $3. Hence, more can be bought with the same money. Income is the same as ‘Real Income’. Purchasing power increases as prices fall, and It decreases as prices rise.
