lecture 7 - supply and demand, competitive markets Flashcards
what is a price taker?
someone who accepts whatever the market price is
they have no market power to charge a different price
no control to dictate the price of a good/service
what is everyone considered in perfect competition?
a price taker
no one has market power
what is meant by the pareto efficient?
economy which only sells one good
only way to make someone better off is to give them more of that good, without meaning someone else is worse off
most markets are pareto inefficient
what can constrain buyer and sellers to be price takers?
competition
what determines market equilibrium?
supply and demand
what does competitive equilibrium mean?
occurs when all buyers and sellers are price takers
supply = demand (= market clearing
what is demand based on?
willingness to pay
what is supply based on?
willingness to accept
how do price and quantity change in competitive equilibrium?
in response to supply and demand shocks
how is the real world market different to the model of perfect competition?
model - describes ideal condition in which everyone is a price taker
real - some firms have more power than others, examples would be monopolies
what is a monopoly?
the exclusive supply or trading of a service/good
what are the properties in a perfect competitive market?
- good/service being homogenous (cannot be distinguished form others) / perfect subistutes
- very large number of buyers and sellers
- free entry and exit form market
- price info is easily available
- profit maximisation is key objectiev
what is the feasible set?
set of goods that consumer can afford to purchase
e.g if part of the isocost curvie is above this set then they are not able to afford it
what does the unit specifically look at?
markets and interaction of buyers and sellers
what is competition determined by?
consumer preferences and cost of supplier
what is the reservation price?
the lowest price in which someone is willing to accept for a service or good
how do consumer preferences determine competition?
e.g the difference between someone poor and wealthy
poor - WTP is low and higher WTA
wish - WTP is high and low WTA
if you are no longer in need of the certain good then the WTA may be lower
what does a supply curve allow?
allows you to see how much of a good can be supplied at a given price
what has modern communication allowed?
advertisement of goods and services for seller
buyers can more easily find out what is available and for the difference prices
many markets are no online rather than face to face
don’t have to buy as soon as you buy you can research around
what did alfred marshall do?
created the model of supply and demand
what did alfred marshall state in relation to his supply and demand model?
- supply curve is determines y sellers wta
- demand curve by wtp
price demanded would never be very far form the being equal to price supplied
what is the equilibrium price?
equality between supply and demand
= market clearing
= supply = demand
what happens if price is above price equilibrium?
suppliers would sell large quantities but buyer wouldn’t buy as too expense so create an excel of supply
how could sellers benefit if supply not equal to demand?
they could benefit by charging a different price e.g lower so that demand rises
eventually settling at an equilibrium
how is alfred marshalls model linked to ceteris paribus?
in the fact that all goods are identical
what is nash equilibrium?
a stable state in which no participant can gain from unilateral change (by one person) if others strategies remain the same
how is competitive equilibrium an example of nash equilibrium?
no actor can do better than continue what they are doing, accepting equilibrium price as both supply and demand are price takers
in the unit who are the sellers?
individual people but also firms
when are firms price takers?
when each of the firms is producing identical products meaning that consumers can easily switch who they buy from
no benefit to trade different from the prevailing market price
what are marginal costs?
the cost of producing one extra unit of good or service
when do marginal costs rise?
as production increases
average price falls
if price = marginal cost what is the profit?
0
when do isoprofit lines slope down?
when price = MC
what is a firms supply curve?
equals the marginal cost curve
how do you find a supply curve?
you ad up the total amount of seller and what price they will supply at
also the same for a market
when do firms gain an economic rent?
when the market clearing is at a lower price than where p=MC
why do buyers and sellers voluntary engage in trade?
as they both benefit
how are mutual benefit sin equilibrium allocation measured>
by consumer and producer surplus
what is buyer surplus?
WTP higher than market price
what is producer surplus?
marginal cost of production is below the market price
what is dad weight loss?
loss in producer and consumer surplus
there is no deadweight loss at equilibrium price
when are maximum gains reached?
at equilibrium price
what happens in demand curve if demand increases>
it shifts to the right
what happens when demand increases?
- dc shifts right
- there is an increase in price
- leads to an increase in supply
- supply curve does not shift but there is movement up the curve
- the equilibrium price rises
how could supply increases?
due to improved efficiency in supply
new technique means more goods can be made quicker and cheaper leading to a fall in MC
what are shifts in supply and demand known as/due to ?
shocks
what does an increase in supply lead to?
a fall in price and rise in quantity sold
what is an economic shock?
unexpected or unpredictable event that affects an economy
brings changes in economic growth, inflation and unemployment
why might supply change?
due to firms entering and exiting a market
why might firms enter a new market>
if there is an economic rent
what is meant by costs of entry>
costs associated with entering a market such as acquiring equipment
what does the entry of new firms mean for existing firms?
they may drive profit down to zero due to increased somepeptive and trading at lower prices eliminating economic rent as market price falls
excess of supply if price is not lowered
why do governments issue taxes?
for revenue and to effect the location of goods/services in some way
for example sugar tax is meant to slow down the trading of products with high sugar
if there is a tax what happens to the MC?
if there is a tax on the supply of a product then the MC curve/supply curve rises by the percentage of the tax
this creates a deadweight loss (the triangle between the supply demand and original equilibrium price
what are the effects of tax?
- consumer surplus falls , pay more and buy less
- procure surplus falls , produce less dn receive less
- totally surplus falls
