2.3 Competitve Markets Flashcards
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 mechansum
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
