Lecture 8 Topic 8

Question 1

What can firms with market power do?

Answer 1

Set their own price

Question 2

Demand curve = ?

Answer 2

Total quantity that all consumers together want to buy at any given price

Question 3

What does the demand curve represent?

Answer 3

WTP (willingness to pay) of buyers

Question 4

Supply curve = ?

Answer 4

Total quantity that all firms together would produce at any given price

Question 5

What does supply curve represent?

Answer 5

WTA (willingness to accept) of sellers

Question 6

What happens at the equilibrium price?

Answer 6

Supply = demand

Question 7

Is the price equilibrium a Nash equilibrium?

Answer 7

Yes

Any other price isn’t a nash equilibrium as there would be excess supply or not enough supply in relation to the demand

Question 8

Can price taking firms benefit from choosing a different price from the market price?

Answer 8

No, they cannot benefit from choosing a different price from the market price and they cannot influence the market price

Question 9

What is a price-taking firm?

Answer 9

A firm without market power who accept the price that the market has determined for their products

Question 10

For price taking firms, the demand curve is…

Answer 10

Flat

Question 11

When do price taking firms maximise profits?

Answer 11

When MC=P

Marginal cost = price

The firms supply curve = MC curve also for price-taking firms

Question 12

Market supply curve = ?

Answer 12

The total amount produced by all firms at each price

If firms have identical cost functions, market supply curve = marginal cost curve

Question 13

Competitive equilibrium = ?

Answer 13

At the prevailing market price, supply = demand

Question 14

Supply curve is … sloping

Demand curve is … sloping

Answer 14

Supply is Upward
Demand is Downward

Question 15

What are the characteristics of competitive equilibrium?

Answer 15

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)

Question 16

Examples of exogenous shocks?

Answer 16

Technological change, popularity

Question 17

Can exogenous shocks shift the entire supply or demand curve?

Answer 17

Yes

Buyers and sellers will adjust their behaviour due to exogenous shocks

Question 18

Does market entry cause the supply curve to shift?

Answer 18

Yes

If existing firms are earning economic rents and costs of entry aren’t too high, other firms may enter the msrket

Question 19

Do the governments use of taxes alter the supply/demand curve?

Answer 19

Yes

Taxes on suppliers/customers shift the supply/demand curve because the price is higher at each quantity

Question 20

What does tax incidence depend on?

Answer 20

Relative elasticity of consumers and producers

The less elastic group hears more of the tax burden

Question 21

What are the properties of a perfectly competitive market?

Answer 21

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

Question 22

Law of one price = ?

Answer 22

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

Question 23

What are economists’ two tests for competitive equilibrium?

Answer 23

Do all trades take place at the same price?

Are firms selling goods at a price equal to marginal cost?

Question 24

Price setters properties = ?

Answer 24

Monopoly

MC < price

Deadweight losses (Pareto inefficient)

Owners receive economic rents in both long & short run

Question 25

Price takers properties = ?

Answer 25

Perfect competition

MC = price

No deadweight losses (can be Pareto efficient)

No economic rents in the long run