lecture 2 Flashcards
What is a perfectly competitive market?
A market structure where many firms offer a homogeneous product and no single firm can influence the market price.
What happens to price during a shortage?
Price rises.
What happens to price during a surplus?
Price falls.
What is the effect of a rise in demand on quantity supplied?
Quantity supplied rises.
What is the effect of a rise in supply on price?
Price falls.
What is the ‘law of demand’?
As the price of a good decreases, the quantity demanded increases, and vice versa.
What are the two main effects that influence demand?
- The income effect
- The substitution effect
What causes a rightward shift in the demand curve?
An increase in demand.
What causes a leftward shift in the demand curve?
A decrease in demand.
The demand curve for a good is constructed based on which factors?
- Tastes
- Number and price of substitute goods
- Number and price of complementary goods
- Income
- Distribution of income
- Expectations
What is a supply curve generally characterized by?
It is generally upward sloping.
What factors can cause a rightward shift in the supply curve?
- Fall in costs of production
- Reduced profitability of alternative products
- Increased profitability of goods in joint supply
- Benign shocks
- Expectations of a fall in price
What is market equilibrium?
The point where quantity demanded equals quantity supplied.
What happens when price is above equilibrium?
A surplus occurs, leading to a price fall.
What happens when price is below equilibrium?
A shortage occurs, leading to a price rise.
What is the effect of a rightward shift in the demand curve on price?
Price rises.
What is the effect of a leftward shift in the supply curve on price?
Price rises.
Fill in the blank: The relationship between supply and price is such that as price rises, firms ______ more.
supply
True or False: A rise in the price of substitute goods will lead to an increase in demand for the original good.
True
What is the significance of equilibrium in a competitive market?
It determines the price and output levels in the market.
What is meant by the term ‘interdependence of markets’?
The effect that changes in one market can have on another market.
What can lead to an increase in supply?
A fall in costs of production.
What is the response in the goods market when there is a rise in demand?
Price and quantity supplied both rise.
What is the response in the factor markets due to a rise in demand for a good?
An increase in demand for factors used to produce the good.
