Chapter 3 - Markets Flashcards
What is a market?
A market refers to the buyers and sellers who trade a particular good or service
What is the competitive market?
fully informed, price-taking buyers and sellers easily trade a standardized good or service
What are the 4 characteristics of a perfectly competitive market?
- Standardized good
- Full information
- No transaction costs
- Participants are price takers
Buyers and Sellers
Buyers (consumers) - determine the demand
Sellers (producers) - determine the supply
Quantity demanded (definition)
the amount of a particular good or service that buyers are willing and able to purchase at a given price.
Law of demand (definition)
states that the lower the price, the higher the quantity demanded. (vice versa, higher price = smaller quantity demanded)
If price falls, benefit of the good/service remains, but the opportunity cost falls. (if price goes up, opportunity cost goes up)
Demand schedule (definition)
displays the quantities demanded at various prices
Demand curve (definition)
illustrates the relationship between quantity demanded and the price of the good, holding all of the other non-price determinants constant.
- downward slope
Non-price determinants of demand
- Preference
- Price of Related goods
- Incomes
- Expectations
- Number of Buyers
What happens when one of the non-price determinants changes?
- if positive influence, demand increases
- if negative influence, demand decreases
Shifts in the demand curve
Right = demand increases Left = demand decreases
What is a shift?
Change in NON-PRICE determinant, increase/decrease in demand
What is a movement?
Change in PRICE, increase/decrease in the quantity demanded
Quantity supplied (definition)
the amount of a particular good that producers are willing and able to sell at a given price.
Law of supply (definition)
the higher the price, the higher the quantity supplied, all other things equal. (vice versa, the lower the price, the smaller the quantity supplied)
If price goes up, benefit goes up with respect to opportunity cost. ( if price falls, benefit falls with respect to opportunity cost)
Supply schedule (definition)
display the quantities supplied at various prices
Supply curve (definition)
illustrates the relationship between the quantity supplied and the price of the good, holding all of the other non-price determinants constant.
upward slope
What are the non-price determinants of supply?
- Price of related goods
- Technology
- Price of Inputs
- Expectations
- Number of Producers
What happens when one of the non-price determinants changes?
positive influence = supply increases
negative influence = supply decreases
Shifts in the supply curve
supply increases - supply curve shifts to the right
supply decreases - supply curve shifts to the left
Shift
change in NON PRICE determinant
Movement
change in PRICE
What is market equilibrium?
the point where the demand curve intersects the supply curve
- the quantity supplied exactly equals the quantity demanded
What happens when the market is not in equilibrium? (disequilibrium)
- quantity demanded is not equal to quantity supplied
- if price is too high, EXCESS SUPPLY occurs and there is a SURPLUS of the good
- if price is too low, EXCESS DEMAND occurs and there is a SHORTAGE of the good or service
What is a surplus?
provides incentives for the price to decrease
Qs - Qd
What is a shortage?
provides incentives for the price to increase
Qd - Qs
