Market Structures Chapter 3 Flashcards
What is price Mechanism?
Price mechanism refers to the process of price determination by the interaction of free market forces of demand and supply.
How is equilibrium Price determined?
Equilibrium price of a commodity is determined by supply and demand.
When is Equilibrium price dynamic?
Equilibrium price is changes when there is change in demand or supply.
Law of demand/ Principle of demand?
The inverse relationship between price and demand is called the principle of demand.
Principle of Supply?
The direct relationship between supply and price. When price increases supply increases and vice versa. (do not write vice versa for uni tests)
Equilibrium price?
Equilibrium price is the price at which supply and demand of a commodity are equal. Where they intersect on the graph.
How is demand drawn graphically?
It is downward sloping and moves for positive to negative on x-axis and moves from lower to higher on Y-axis.
How is supply drawn graphically?
Supply moves from lower to higher on x-axis (from origin to higher) and similar in y-axis.
What is the meaning of a market in economics
In economics market is an arrangement/platform by which sellers and buyers of a commodity interact to determine its price and quantity.
How is market classified in economics?
Competition, The nature of competition.
Three ways markets are classified in economics?
Perfect competitive market
Monopoly market
Imperfect competitive market
How are imperfect competitive market further divided?
Monopolistic competition
Oligopoly (limited competition)
Duopoly(only two suppliers dominate the market)
What is Perfect competition?
It is market situation in which there are a large number of buyer and sellers for a homogenous product and the price is determined by the market forces.
Why is perfect competition called a price taker?
Perfect competition has many buyers and sellers of a product, so no single buyer or seller can affect the market price.
The seller is the price taker.
Characteristics of Perfect competition?
1)Large number of buyers and sellers:
Each seller can only sell a small portion of the product and therefore cannot dominate the market. The price is set by the the forces of market (demand and supply). Sellers/ firms are thereby known as price takers instead of makers.
2)Homogenous products: Similar
3)A single price: One price remains for both buyers and sellers.
4)Free entry and exit of firms: Firms are free to enter and leave the market based on profit and loss.
5)Perfect Knowledge of market condition: All the buyers and sellers have perfect knowledge on the market condition.
6)Perfect mobility of factors of production: The factors of production are perfectly mobile i.e. they can move to any industry or territory to get higher rewards.
7)Absence of selling and transportation costs: There should be no selling and transportation expense as this can cause price variations.
What is pure competition? (similarities to perfect competition)
Pure competition is said to exist when the
1) Market has a large number of buyer and sellers
2)The products are same (homogenous)
3)There is a single price for the products for both sellers and buyers
4)Firms are free to enter and exit the market.
(basically the first four characteristics of perfect competition)
Difference between pure competition and perfect competition?
Perfect competition, firms are said to have
1) perfect Knowledge of the market conditions.
2) Perfect mobility of factors of production.
These are both not present in pure competition (perfect comp. is an ideal)
What is equilibrium?
Latin word ‘acquis’ and libra meaning equal balance.
Means “stability or “state of rest”
when is a firm said to be in equilibrium?
When a firm or industry does not intend to change the volume of output which it is producing.
What is a firm?
A business unit concerned with the production of commodity for selling it for a profit.
What is industry?
A collection of business units/firms producing the same product.
Who sets price in perfect competition?
The industry will. Since there are many seller for a similar product no one seller can decide.
What is the law of supply?
At a higher price higher quantity will be supplied and at a lower price a lower quantity will be supplied.
Read page 75 for perfect competition graphical explanation.
pg 75
What is equilibrium output?
The output that yields maximum profit to the firm.
What is Marginal cost?
The cost to produce one additional unit of a commodity is called MC.
What is Marginal Revenue?
The revenue generated by selling additional unit of a commodity.
In Perfect competition who is the price setter and who is the price taker?
The price setter is the Industry
and the price taker is the firm.
When does a firm reach equilibrium position?
1)When MC is equal to MR.
2)When the MC curve cuts the MR curve from below.
MC curve should have positive slope.
Why does Average Revenue (AR) equals Marginal Revenue in perfect competition?
This is because in perfect competition price of commodity is homogenous or equal.
How does time affect determination of price?
Due to the technical aspect of production, a certain amount of time is expected for a firm to increase its output.
The cost of production also varies over time.
This directly affects price.
What is the basis of supply of a product?
Cost of production. C
How did Marshall divide time periods ?
Very short period (Market period)
short period
long period
very long period (Secular period)
What is very short period also known as?
Market period
What is very long period also known as?
Secular period
Explain market period? VERY SHORT PERIOD?
Time period: Usually considered very few days.
Fixed Supply: Since the days are short the inventory/stock/supply remains the same.
Pricing: Demand alone determines the price.
Demand is directly responsible for price i.e. demand increases price increases demand decreases price decreases.
Commodity type: Perishable goods
Supply line in graph: It is a straight vertical line.
E.g. milk fish eggs perishable goods.
Short period?
Time period: Time during which the supply of a commodity can be influenced/changed without changing existing plant/machinery. No time to change the scale of production.
Pricing: Determined by supply (to a certain extent) and demand.
Commodities are durable and reproduceable
Supply line in graph: Moving upwards from left to right
What is price determined during short period called?
Short run normal price.
What is Long period?
Time Period: sufficient time is available to change fixed as well as variable production factors like machinery and plant.
Pricing: Since output changes by changing all production factors. Supply can be adjusted to changing demands. Thus the price in the long period is determined by the forces of both demand and supply (factors of production). Cost of production has a decisive role in price determination.
Supply in graph: The graph would be more flatter than short period.
What is price determined during long period called?
Long run normal price.
What is very long period?
The very long period will include all the changes in demand and supply which require a long period of time, such as change in population, supply of raw materials, supply of capital etc. These are structural changes.
Which principle is used to derive the supply curve of a firm ?
The principle of profit maximization
Which principle is used to derive the demand curve of a firm?
The principle of utility maximization
