Chapter 8: Supply and demand - Price-taking and competitive markets Flashcards
Price-taking effect on gains from trade
Price-taking ensures that all gains from trade in the market are exhausted at a competitive equilibrium
What does the model of perfect competition describe
The model of perfect competition describes idealised conditions under which all buyers and sellers are price-takers.
Real world markets are not typically perfectly competitive, but some policy problems can be analysed using the demand and supply model
Willingness to pay
An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good. See also: Willingness to accept.
e.g. eBay allows us to reveal willingness to pay as the price is flexible.
Willingness to accept
The reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high. See also: Willingness to pay.
Reservation price
The least price at which someone is willing to sell a good (keeping the good is the potential seller’s reservation option).
A seller will sell at any level above their reservation price - Higher the price the more sellers willing to sell.
Price-taker
When an entity cannot choose the price of sale because of a prevailing market price.
It is not demand that affects your price but the price charged by your competitors.
e.g. bread shop cannot sell above prevailing market price in local area as no one would buy it.
A price-taking firm maximises profit by choosing a quantity where the marginal cost is equal to the market price (MC = P) and selling at the market price P.
For a price-taking firm, the marginal cost curve is the supply curve: for each price it shows the profit-maximising quantity: that is the quantity that the firm will choose to supply.
What is profit-maximising price?
Profit-maximising price is the highest number of loaves being sold whilst keeping to market price
You will receive your profit-maximising price as any more and you will be charging too much so less people will buy and if you charge much less you reach closer to no-economic profit.
What is profit-maximising quantity?
Profit-maximising quantity is found at the point where your price is equal to the marginal cost.
P = MC
Deadweight loss
A loss of total surplus relative to a Pareto efficient allocation.
Consumer surplus
The amount of money above the equilibrium price that a consumer is willing to pay for a good
AKA the buyers gains from trade.
Producer surplus
The amount of money under the equilibrium price that shows the producers gains from trade in a given market.
Pareto efficiency
A state of allocation of resources in which it is impossible to make any one individual better off without making at least one other individual worse off.
