Chapter 8 Flashcards
What does the demand curve represent?
The willingness to pay of buyers
As the price increase what happens to the willingness to pay?
It decreases as the demand curve decreases
What is the supply curve?
The total quantity that all firms together would produce at any given price
Represent the willingness to accept of sellers (sellers can have different reservation prices)
What factors can affect the supply curve?
How much people need to part with books
Takes effort to sell so bellow a certain price it’s not worth it to them
How many goods are brought to market
What happens at equilibrium price?
The market clears as supply equals demand
What happens if price is set above the equilibrium price?
It’s not a Nash equilibrium as some sellers would benefit from lowering their prices (excess supply)
Define a price-taking firm
Can’t benefit from choosing a different price from market price and can’t influence the market price
Demand curve is flat, max profits at MC=P
FIRM CHOOSES QUANTITY NOT PRICE
Where on an isoprofit curve would marginal cost (MC) equal profit?
Slope of isoprofit curve is 0
What is the market supply curve?
Total amount produced by all firms at each price
If firms have identical cost function then…
Market supply curve = market marginal cost curve
Where would you find competitive equilibrium?
When all buyers and sellers are price takers
At the prevailing market price, supply = demand
What are the characteristics of competitive equilibrium?
All gains from trade are exploited (every consumer willing to pay market cost receives good)
When is equilibrium allocation Pareto efficient?
Participants are price takers
Contracts are competitive
Transactions only affect buyers and sellers
How is producer surplus calculated?
Profit - cost to produce (WTA)
How is consumer surplus calculated?
WTP - what they paid
What are exogenous shocks and what do they affect?
Factors that are outside the market study that can shift the entire supply or demand curve (can be cause by technology change, shift in popularity)
What would cause market entry?
Existing firms are earning economic rent and cost of entry isn’t high other prices firms may enter market
Results in more product being produced overall causing market shift
How can taxes affect supply and demand?
Taxes on suppliers/ consumers shift supply/demand curve as prices are higher at each quantity
They lower consumer surplus and producer surplus
Generate revenue and deadweight loss
What do tax incidence depend on?
The relative elasticity of consumers and producers
The less elastic group bears more of the year burden
What is a fall in total surplus related to?
Positively related to elasticity of demand
What must a market have to be perfectly competitive?
Goods or services being exchanged is homogenous (milk from Tesco is the same as milk from Asda)
Very large number of potential buyers and sellers
Buyers and sellers all act independently of one another
Price information easily available to buyers and sellers
What is the law of one price?
All transactions take place at a single price
What are the tests used for competitive equilibrium?
Do all trades take place at the same price
All firms selling goods at a price equal to marginal cost
