EM 4 - Markets Flashcards
Market equilibrium
The price and quantity designated at the intersection of the demand and supply curves.
Excess demand and excess supply of a product
When prices are higher than the equilibrium price - excess supply
When prices are lower than the equilibrium price - excess demand
Property of efficiency
At equilibrium, total surplus - i.e. consumer surplus + producer surplus - is maximised.
There is no deadweight loss - or loss in value from trades between buyers and sellers that could have occurred but didn’t.
Government interventions
Often undertaken to achieve “fairer” outcomes.
Often these involve price ceilings or price floors.
Price ceiling
Maximum price that can be charged for a product.
If it’s above the market equilibrium, it will have no effect. If it’s lower than equilibrium, it will lead to excess demand or a shortage.
Price floor
Minimum price that can be charged for a product (e.g. minimum wage)
If it’s lower than the market outcome, it has no effect.
If it’s higher, it leads to excess supply, or surplus (e.g. unemployment).
Taxes
Levied on producers -
Typically increase the cost of producing the good - shift supply curve upward.
Levied on consumers -
Reduce demand - shift demand curve leftward.
Tax bearing and elasticity of curves
When demand curve is steeper (inelastic) - consumers bear the tax
When supply curve is steeper (inelastic) - producers bear the tax
Creating markets
Markets can be created where they previously didn’t exist by assigning ownership of a good to individuals, or by creating a forum in which individuals can trade.
Role of prices in the market
Buyers operate independently, and sellers operate independently - prices act as the “go-between”
Prices contain information that co-ordinates and incentivizes both sides.
Three questions when analyzing a market in terms of supply and demand
i. What are the sources of ss and dd? (who’s buying, selling);
ii. What drives the shape (elasticity) of the ss and dd curves? (how sensitive to price shifts and what causes it); and
iii. What forces could shift dd and ss in this market?
Four categories of spillovers
i. Complements and substitutes;
ii. both sides of the market - i.e. demand and supply;
iii. geographic spillovers; and
iv. changes in product markets affecting factor markets.
