Lecture 8 Topic 8 Flashcards
What can firms with market power do?
Set their own price
Demand curve = ?
Total quantity that all consumers together want to buy at any given price
What does the demand curve represent?
WTP (willingness to pay) of buyers
Supply curve = ?
Total quantity that all firms together would produce at any given price
What does supply curve represent?
WTA (willingness to accept) of sellers
What happens at the equilibrium price?
Supply = demand
Is the price equilibrium a Nash equilibrium?
Yes
Any other price isn’t a nash equilibrium as there would be excess supply or not enough supply in relation to the demand
Can price taking firms benefit from choosing a different price from the market price?
No, they cannot benefit from choosing a different price from the market price and they cannot influence the market price
What is a price-taking firm?
A firm without market power who accept the price that the market has determined for their products
For price taking firms, the demand curve is…
Flat
When do price taking firms maximise profits?
When MC=P
Marginal cost = price
The firms supply curve = MC curve also for price-taking firms
Market supply curve = ?
The total amount produced by all firms at each price
If firms have identical cost functions, market supply curve = marginal cost curve
Competitive equilibrium = ?
At the prevailing market price, supply = demand
Supply curve is … sloping
Demand curve is … sloping
Supply is Upward
Demand is Downward
What are the characteristics of competitive equilibrium?
All gains from the trade are exploited in equilibrium, there’s no deadweight loss
Pareto efficient (as long as participants are price-takers and contracts are complete)
Examples of exogenous shocks?
Technological change, popularity
Can exogenous shocks shift the entire supply or demand curve?
Yes
Buyers and sellers will adjust their behaviour due to exogenous shocks
Does market entry cause the supply curve to shift?
Yes
If existing firms are earning economic rents and costs of entry aren’t too high, other firms may enter the msrket
Do the governments use of taxes alter the supply/demand curve?
Yes
Taxes on suppliers/customers shift the supply/demand curve because the price is higher at each quantity
What does tax incidence depend on?
Relative elasticity of consumers and producers
The less elastic group hears more of the tax burden
What are the properties of a perfectly competitive market?
The good/service being exchanged is homogenous
Large number of potential buyers/sellers
Buyers & sellers act independently
Price information is easily available to buyers & sellers
Law of one price = ?
All transactions take place at a single price
At that price, the market clears (supply=demand)
Buyers & sellers are all price takers
All potential gains are realised, no deadweight loss
What are economists’ two tests for competitive equilibrium?
Do all trades take place at the same price?
Are firms selling goods at a price equal to marginal cost?
Price setters properties = ?
Monopoly
MC < price
Deadweight losses (Pareto inefficient)
Owners receive economic rents in both long & short run
Price takers properties = ?
Perfect competition
MC = price
No deadweight losses (can be Pareto efficient)
No economic rents in the long run
