Markets Model and PPC Flashcards
Consumer Needs
Rational consumers are motivated by self interest and thus aim to maximise utility (satisfaction)
Producer Needs
Producers will act in self interest and thus are motivated to maximise profit
Consumers will desire
Competition (have cheaper options)
Lowest Prices (maximise utility)
Choice (options)
Innovation (new products)
Producers will desire
Market Power
Price control
Barriers to entry
Highest quality
Efficiency
Innovation
Cerebis Paribus
All other things are equal
Perfect competition
the situation prevailing in a market where buyers and sellers are so numerous and well informed that all elements of monopolies are absent, and the market price of a commodity is beyond the control of individual buyers and sellers
Characteristics of perfect competition
Firms are small in size, exists in large numbers, produce homogenous products
Markets have no barriers to entry or exit, perfect information
Functions of Price
Signaling - Change of price communicates to the producer and consumer about excess supply or demand influencing decisions on resource allocations
Incentive - The ability of prices and changes of price to convey information to consumers and producers and motivate them to change their behaviour. provides an incentive
Consumer Surplus
The highest price consumers are willing to pay for a good, subtract the price actually paid
Producer Surplus
The price received by firms for selling their good, subtract the lowest price that they are willing to offer it for
Social Surplus
Consumer surplus + Producer surplus
(when social surplus is maximised, it is allocatively efficient)
Demand and Supply Model
The quantity of a product which buyers will purchase at a given price over a given period of time.
Not a want or desire.
Law of Demand
When the price of a good increases the quantity demanded decreases. (inverse)
Law of Supply
As the price of a good increases, the supply will also increase. (converse)
Non - Price determinant of Supply
Cost of production
Technology
Prices of competitive supply
Prices of joint supply
Taxes (indirect and taxes on profit)
Subsidies
Expectation of price future
Shocks, unpredicted event
Numbers of firms/suppliers
Short run
A time period in which one input is fixed and cannot be changed by a firm (short time)
Long run
A time period in which all inputs or variables can be changed by a firm (long time)
Formula for Leakages (Total income?)
Consumption expenditure (C) + Savings (S) + Taxes (T)+ Imports (M)
Formula for Total Income (Before costs and savings, etc…)
Wages + Rent + Interest + Pi
Total Expenditure Formula
C + I + G + (X - M)
