2.3 Competitive Markets Flashcards
market equilibrium occurs at the point where
the supply curve of a good or service crosses the demand curve
equilibrium price
price at which the quantity demanded of a good is equal to the quantity supplied, so that there are no surpluses or shortages of the good
excess supply or surplus
supply > demand
excess demand or shortage
demand > supply
What is a market
Any kind of arrangement where buyers and sellers of goods and services or resources are inked together to carry out an exchange
What is competitive market equilibrium
Quantity demanded equals quantity supplied
What is market disequilibrium
excess demand (shortage)
excess supply (surplus)
Forces of demand and supply cause price to change until market reaches equilibrium
What is the price mechanism
Price determined by the forces of supply and demand in competitive markets
Functions of the price mechanism
Resource allocation
Rationing
How are resources allocated via the price mechanism
Signaling- prices communicate info to decision makers
Incentives - decision makers respond to this information
Rationing via the price mechanism
Rationing is the method of apportioning out goods and services among consumers or households
Involves the use of prices freely determined in markers - whether or not consumers get a good depends on the price of the good
What is allocative efficiency
achieved when economy allocates resources in the most efficient way so that the society gets the most benefits from consumptions
When MB = MC
Where is producer and consumer surplus and what is it?
Consumer surplus - the highest price consumers are. Willing to pay for a good minus the price they actually pay
Producer surplus - price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good
What is social/community surplus
The sum of consumer plus producer surplus
At the point of competitive market equilibrium it is maximum
What is welfare loss
When markets fail to achieve allocative efficiency and social surplus is reduced
what does price mechanism determine
how scarce resources are allocated in an economy
feedback loop
interdependency between two or more components of a system, where the change in state of one component affects the other. In turn, this effect then feeds back to alter the original component.
signalling function of prices
The function of the price mechanism where information is provided to consumers and producers about what should be consumed and produced.
incentive function of prices
The function of the price mechanism where motivation is provided to consumers and producers to reallocate resources in a market.
Rationing
controlled distribution of resources. Rationing is necessary at any time when goods and resources are scarce.
rationing function
The function of the price mechanism where the economic question of ‘for whom’ is determined
allocative efficiency.
Producing the optimal combination of goods from a society’s point of view; achieved when the economy is allocating resources so that no one can be better off without making somebody else worse off.
Productive efficiency
producing goods by using the fewest possible resources, which implies producing at the lowest possible cost
consumer surplus
The difference between the price that consumers pay and the price that they are willing to pay.
Producer surplus
difference between the lowest price producers are willing and able to offer the good and the actual price that they receive for it
Social/community surplus
sum of the consumer surplus and producer surplus. It is the total benefit gained by society when the market is at equilibrium.
