Ch 2. Competitive Markets: Demand and Supply Flashcards
Market
Any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange
Competition
process in which rivals compete in order to achieve some objective
Competitive Markets
large numbers of sellers and buyers acting independently, so that no one individual seller of small group of sellers has the ability to control the price of the product sold
Demand
Indicates the various quantities of a good that consumers are willing and able to buy at different possible prices during a particular time period, ceteris paribus
Demand Curve
Curve showing the relationship between the price of a good and the quantity of the good demanded, ceteris paribus
Law of Demand
there is a negative relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus (as P increases, QD falls, vice versa)
Market Demand
Sum of all individual demands for a good
Non-price determinants of demand
Variables that can influence demand, and that determine the position of any demand curve, a change in any determinant of demand causes a shift of the demand curve
Increase in demand
Rightward shift
Decrease in demand
Leftward shift
Normal Good
demand for it increases in response to an increase in consumer income
Inferior good
Demand falls as consumer income increases
Substitute
Two goods that satisfy a similar need
Complementary Goods
tend to be used together (ketchup and hotdogs)
Quantity Demanded
Movement on the demand curve
Utility
Satisfaction that consumers gain from consuming something
Law of diminishing marginal utility
As consumption of a good increases, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed
Substitution Effect
There is an inverse relationship between price and QD
Income Effect
As P falls real income increases
Supply
Various quantities of a good a firm is willing and able to produce and supply to the market for sale at different possible prices, during a particular time period, ceteris paribus
Supply Curve
A curve showing the relationship between the price of a good and the quantity of the good supplied, ceteris paribus
Law of Supply
There is a positive relationship between the quantity of a good supplied over a particular time period and its price, ceteris paribus
Market Supply
Sum of all individual firms’ supplies for a good.
Non-Price Determinants of Supply
The variables that can influence supple, and that determine the position of a supply curve
Competitive Supply
2 goods compete with each other for the same resources
Join Supply
Production of goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other
Subsidy
Payment made to the firm by the government, and so has the opposite effect of a tax
Quantity Supplied
Movement on the supply curve
Increase in supply
Rightward Shift
Decrease in Supply
Leftward Shift
Short Run
Time period during which at least one input is fixed and cannot be changed by the firm
Long Run
Time period when all inputs can be changed
Marginal Product
Extra of additional output produced by one additional unit of a variable input
Law of Diminishing Marginal Returns
more units of a variable input are added to one or more fixed inputs, the marginal product of the variable input at first increases, but there comes a point when it begins to decrease
Total Cost
all costs of production incurred by a firm
Marginal Cost
Extra or additional cost of producing one more unit of output
Marginal product and Marginal returns
When marginal product increases, Marginal cost decreases. WHen MP is max, MC is min, when MP falls, MC increases
Excess Supply/surplus
Excess of something over something else to which it is being compared
Excess demand/ shortage
Amount by which quantity demanded is greater than quantity supplied
Equilibrium
State of balance between different forces, such that there is no tendency to change
Market Equilibrium
QD = QS
Competitive Market Equilibrium
QD = QS, and there is no tendency for the P to change
Allocative Efficiency
Producing the quantity of goods mostly wanted by society
Marginal Benefit
Extra or additional benefit received from consumer one more unit of a good
Consumer Surplus
Defined as the highest price consumers are willing to pray for a good minus the price actually parid
Producer Surplus
Price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good
Social Surplus
Sum of consumer and producer surplus, it is maximum in a competitive market with no market failures
Welfare
amount of consumer and producer surplus. when MB = MC, social welfare is maximum
Consumer surplus
((P intercept of D curve - P of consumers) X QPurchased) / 2
Producer Surplus
((P of producers - P intercept of S curve) x Q sold) / 2
Area of a Trapezium
((a+b) x c) / 2
Welfare Loss
Social welfare is no longer maximum on account of a portion of it being lost
Rational Consumer Choice
Make choices on what to buy based on assumptions:
- choices are consistent
- They have perfect information
- They try to max utility
Biases
Refers to systematic errors in thinking or evaluating
Rules of Thumb
guidlines based on experience
Anchoring
Use of irrelevant information to make decisions
Framing
How choices are presented to decision-makers
Availability
Information that is most recently available
Bounded Rationality
Consumers are rational only within limits
Bounded Self-Control
People in reality exercise self-control only within limits
Bounded Selfishness
People are selfish only within limits
Nudge
method designed to influence consumers’ choices in a predictable way
Default Choice
doing the option that results when one does not do anything
Restricted Choice
limited by the government or other authority
Mandated Choice
Choice between alternatives that is made mandatory by the government or other authority
Rational Producer Behavior
firm tries to maximise profit
Market Share
Percentage of total sales in a market that is earned by a single firm
