8 - Supply and demand: price-taking and competitive markets

Question 1

Price-taking firms

Answer 1

In a perfectly competitive market, the firm is a price-taker – meaning it has no power to influence the market price; The firm is so small in proportion to the overall market that is has no market power, so it can sell any quantity it is able to produce at the market price.

Question 2

Competitive equilibrium

Answer 2

A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplier is equal to the quantity demanded.

Question 3

Exogenous shocks

Answer 3

A sharp change in external conditions affecting a model

Question 4

Taxation

Answer 4

The levying of tax by the government to raise revenue (to finance government spending, or redistribute resources) or to affect the allocation of goods/services in other ways, perhaps because the government considers a particular good to be harmful.

Question 5

Model of perfect competition

Answer 5

Perfectly competitive equilibrium occurs in a model in which all buyers and sellers are price-takers. In this equilibrium, all transactions take place at a single price – known as the law of one price. At that price, the amount supplied equals the amount demanded: the market clears. No buyer or seller can benefit by altering the price they are demanding or offering – they are both price-takers. All potential gains from trade are realised.