2A Flashcards
Define Market
The market for a given good or service is the set of all the consumers and suppliers who are willing to buy or sell that good or service at a given price.
Market Equilibrium
Occurs when the price and quantity of a given good is stable.
Equilibrium Price
quantity that consumers want today is the same as the quantity suppliers want to sell
6 Characteristics of a perfectly competitive market
- Consumers and suppliers are price takers.
- Homogeneous goods
- No Externality
- Goods are excludable and rival
- Full information
- Free entry and exit
Marginal Benefit
extra benefit accrued by producing that unit.
Marginal cost
the opportunity cost of producing a unit of a good
cost-benefit principle
an action should be taken if the marginal benefit is equal to or greater than the marginal cost. We assume ceteris paribus.
ceteris paribus
only two variables change and we assume that everyone is rational
economic surplus
difference between marginal cost and marginal benefit. An economist’s goal is to maximise positive surplus.
Quantity supplied
represents the quantity of a given good or service that maximises the profit of the supplier.
supply curve
represents the relationship between price of a good or service and the quantity supplied of that good or service.
law of supply
describes the tendency for a producer to offer more of a certain good or service when the price of that good or service increases.
Pitfalls of Cost-Benefit Principle
- failing to account for all opportunity costs (i.e. time)
- measuring costs and benefits as proportions rather than absolute dollar amounts
- failing to ignore sunk costs
- failing to know when to use average costs and benefits and when to use marginal costs and benefits
sunk cost
a cost that cannot be recovered and should not affect future decisions
fixed cost
cost associated does not vary with the quantity produced (i.e. use of a machine)
