2.3 Competitive Markets

Question 1

market equilibrium occurs at the point where

Answer 1

the supply curve of a good or service crosses the demand curve

Question 1

equilibrium price

Answer 1

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

Question 2

excess supply or surplus

Answer 2

supply > demand

Question 3

excess demand or shortage

Answer 3

demand > supply

Question 4

What is a market

Answer 4

Any kind of arrangement where buyers and sellers of goods and services or resources are inked together to carry out an exchange

Question 5

What is competitive market equilibrium

Answer 5

Quantity demanded equals quantity supplied

Question 6

What is market disequilibrium

Answer 6

excess demand (shortage)
excess supply (surplus)
Forces of demand and supply cause price to change until market reaches equilibrium

Question 7

What is the price mechanism

Answer 7

Price determined by the forces of supply and demand in competitive markets

Question 8

Functions of the price mechanism

Answer 8

Resource allocation

Rationing

Question 9

How are resources allocated via the price mechanism

Answer 9

Signaling- prices communicate info to decision makers
Incentives - decision makers respond to this information

Question 10

Rationing via the price mechanism

Answer 10

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

Question 11

What is allocative efficiency

Answer 11

achieved when economy allocates resources in the most efficient way so that the society gets the most benefits from consumptions

When MB = MC

Question 12

Where is producer and consumer surplus and what is it?

Answer 12

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

Question 13

What is social/community surplus

Answer 13

The sum of consumer plus producer surplus

At the point of competitive market equilibrium it is maximum

Question 14

What is welfare loss

Answer 14

When markets fail to achieve allocative efficiency and social surplus is reduced

Question 15

what does price mechanism determine

Answer 15

how scarce resources are allocated in an economy

Question 16

feedback loop

Answer 16

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.

Question 17

signalling function of prices

Answer 17

The function of the price mechanism where information is provided to consumers and producers about what should be consumed and produced.

Question 18

incentive function of prices

Answer 18

The function of the price mechanism where motivation is provided to consumers and producers to reallocate resources in a market.

Question 19

Rationing

Answer 19

controlled distribution of resources. Rationing is necessary at any time when goods and resources are scarce.

Question 20

rationing function

Answer 20

The function of the price mechanism where the economic question of ‘for whom’ is determined

Question 21

allocative efficiency.

Answer 21

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.

Question 22

Productive efficiency

Answer 22

producing goods by using the fewest possible resources, which implies producing at the lowest possible cost

Question 23

consumer surplus

Answer 23

The difference between the price that consumers pay and the price that they are willing to pay.

Question 24

Producer surplus

Answer 24

difference between the lowest price producers are willing and able to offer the good and the actual price that they receive for it

Question 25

Social/community surplus

Answer 25

sum of the consumer surplus and producer surplus. It is the total benefit gained by society when the market is at equilibrium.