Micro Econ 2 Flashcards
Supply and Demand Competition Markets
Law of Supply
-As price increases, quantity supplied increases.-
Shifters of Supply
- Number of Sellers: the amount of businesses that provide a product to the market
- Technology: new inventions make production easier-Resource Prices: includes everything from labor to resources to cost of shipping
- Taxes and Subsidies: Taxes make supply decrease and subsidies make supply increase. Taxes decrease supply because it costs the company more to produce the product. *Subsidies increase supply because the government gives money to the company in order to make cost of production less.
- Expectations of Producers: what sellers think will happen in the market
- Prices of Other Goods the Firm Could Produce: sometimes it is cheaper to produce another product than it is to produce the one that you currently are producing
Law of Demand
-As price decreases, quantity demanded increases.-The amount of a good or service that consumers are able and willing to buy at various possible prices during a specified time period.
Shifters of demand
- Change in taste and preferences-People might prefer PlayStation over Xbox and the demand for PlayStation would increase.
- Number of consumers-there is a larger demand when there are more consumers.
- Price of related goods-People aren’t going to buy tacos for $500 when they could buy burritos for $1.50. There will be a greater demand for the lower priced item. ( substitution and complementary)
- Income-When people have more money to spend, demand goes up.
- Future expectation-The demand for gas would go up if people expected prices to increase by a dollar in the next month.
***CHANGE IN PRICE DOES NOT SHIFT THE CURVE. IT ONLY CAUSES MOVEMENT ALONG THE CURVE***
Equilibrium point:
- Equilibrium price is the point of intersection on the supply/demand graph.
- Also called clearing point- people are demanding the same amount at the same price suppliers are willing to provide and sell.
Surplus
- Too many goods are being produced at high price. Above the equilibrium point
- Lower the prices because demand is low.
Shortage
- Too few goods are being produced at a low price, below the equilibrium
- Raise the price because the demand increases.
Why the Law of Demand Exists
- Law of diminishing marginal utility
as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
- income effect
if prices rise and income does not- we cannot buy the same amount of goods
3.Substitution Effect
if price rises AND there is an option to buy a different but similar product we will
substitute goods
- goods used in place of one another.
- If the price of one increases, the demand for the other will increase (or vice versa)
complementary goods
- Complements are two goods that are bought and used together.
- If the price of one increase, the demand for the other will fall. (or vice versa)
inferior goods
- Your off name brands products/ cheaper goods
- As income increases, demand fallsAs income falls, demand increases
normal goods
- your more expensive luxury goods
- As income increases, demand increases
- As income falls, demand falls
elasticity
How consumer responds to changes in price
inelastic demand
-price changes has little impact on the quantity demanded by consumers-milk, gas, medicine etc.
elastic demand
- rise / fall in a product’s price greatly affects the amount that people are willing to buy-pop, airline tickets etc
Price as Indicator
- Prices serve as signals to allocate goods and services
- Rising prices signal producers to produce more and consumers to purchase less-Falling prices signal producers to produce less and consumers to purchase more
VOLUNTARY EXCHANGE:
The transaction in which a buyer and a seller exercise their economic freedom by working out their own terms of exchange
Supply
The ability and willingness producers have to supply goods and each price.
Demand
The ability and willingness consumers have to buy goods at each price point
Why the law of supply exisits
at higher prices profit seeking firms have an incentive to produce more.
Market Structures
the amount competition prevails in markets
Perfect Competition
Control over price- None
Number of Firms- many small firms( thousands)
Types of Goods- all the same- identical
Barriers to Entry- None
Ex. Farmers markets
Monopolistic Competition
Control over price- some control
Number of Firms- many small firms( hundreds)
Types of Goods-slightly different products
Barriers to Entry- really low
Oligopoly
Control over price- A lot
Number of Firms- few- tens
Types of Goods- all the same or different
Barriers to Entry- High
Game Theory
The study of how people behave in strategic situations
-used in oligoplies to see how competiton will set prices since they are interdependent on each other
Collusion
Arrangement among groups of businesses to reduce competition by controlling price, production and distribution of goods
-illegal to do
Monopoly
Control over price- all
Number of Firms- ONE
Types of Goods-unique good
Barriers to Entry- very hard, high
Why are Monopolies a market faliure
LIMIT COMPETITION= HIGHER PRICES FOR CONSUMERS
4 Types of Monopolies
Natural monopoly-
Geographic monopoly-
Technological monopoly-
Government monopoly-
Horizontal mergers
combines directly competing firms producing and/or selling similar products.
-not allowed to happen
Vertical Mergers
combines two firms involved in different stages of producing a good or service
-sometimes allowed to happen
Conglomerate Mergers
combines unrelated firms
-ALLOWED TO HAPPEN
HHI
- How government decide whether or not to oppose a specific merger is anticompetitive
- measure of market concentration-
