Competitive Markets Flashcards
What’s demand?
Is the quantity of a good/service that consumers are willing and able to buy at a given price.
What does a demand curve show?
It shows the relationship between price and quantity demanded.
In a demand curve, what does a decrease and increase in price cause?
A decrease in price causes a extension in demand while an increase in price causes a contraction in demand.
Explain income effect:
Assumes a fixed level of income, the income effect means that as a price falls the amount that consumers can buy with their income increases and so demand increases.
Explain the substitution effect:
A fall in price of a good makes it relatively cheaper than other goods, so consumers will increase demand for the cheaper good and reduce demand for the expensive good.
What are the factors that can cause a shift in the demand curve?
Population Advertising Substitutes price Income Fashion/Tastes Interest rates Complement price
Equation for PED.
% change in QD
—————————
% change in price
Define PED.
Measures the responsiveness of quantity demanded given a change in price.
Define YED.
Measures the responsiveness of quantity demanded given a change in income.
Equation of YED?
% change QD
———————————
% change in income
Define XED.
Measures the responsiveness of quantity demanded of a good/service given a change in price of another.
Equation for XED?
% change in QD
——————————
% change in price
What is supply?
The quantity of a good/service producers are willing and able to produce at a given price in a given time period.
What does a supply curve show?
A supply curve shows the relationship between price and quantity supplied.
Factors that cause a shift in the supply curve.
Productivity Indirect Tax Number of firms Technology Subsidy Weather Cost of production
What cause a contraction on supply?
A decrease in price.
What is joint supply?
Where the production of one good or service involves the production of another.
What’s composite supply?
Where a demand for a product can be satisfied by the supply of two or more goods that are substitutes for each other- tea and coffee
What is competitive supply?
Where two or more alternative goods can be produced from the same factors of production.
define PES.
Measures the responsiveness of quantity supplied given a change in price.
Equation for PES.
% change in QS
——————————-
% change in price
Why is supply more elastic in the long run?
In long run, all factors are variable - so in the longs run a firm can increase its capacity as it has longer to react to changes in price and demand
What are factors that affect PES.
Production Lag Stocks Spare capacity Substitutability of FoP Time
What’s the market equilibrium?
Where demand = supply
What’s excess supply?
When the quantity supplied to a market is greater than the quantity demanded.
What’s excess demand?
When the demand for a good/ service is greater than its supply.
When is there a competitive Market?
When there are a large number of buyers and sellers.
What’s the three functions for the price mechanism?
Acts as a incentive to firms
Acts as a signalling device
Acts to ration scarce resources
What are the 4 advantages of price mechanism?
Resources will be allocated efficiently to satisfy consumer wants and needs.
Consumers decide what is and isn’t produced by producers.
Prices are kept to a minimum as resources are used as efficiently as possible.
What are the 4 disadvantages of price mechanism?
Inequality in wealth and income is likely.
Under provision of merit goods and over provision of demerit goods as supply and demand for these goods won’t be at socially optimal level.
People with limited skills will suffer unemployment.
Public goods won’t be produced.
What’s the consumer surplus?
The difference between the price consumers are willing and able to pay for a good/service and the price that is actually paid.
What’s producer surplus?
The difference between the price producers are willing and able to supply for a good/service and the price they actually they receive.
Where would consumer surplus be on a diagram?
Below demand curve and above price line.
Where is Producer surplus on a diagram?
Above supply curve and below price line
