séance 5 Flashcards
what is the definition of a market thats is in equilibrium?
A market is in equilibrium when the quantity demanded equals the quantity supplied at the market price
on the graph, equilibrium is…
the crossing point of the demand and supply curve
what is the market clearing condition?
Qs=Qd : no excess supply and no excess demand = market cleared
competition between consumers make the price…
go up
competition between producers makes the price..
go down
if P<p></p>
excess demand because customers are able to buy more Qd(P)>Q*. producers are less inclined to produce than at the equilibrium price Qs(d)
what happens to the price when there is excess demand?
excess demand=customers left out of the market. customers compete with each other which makes the price go up until P=P* (biding)
if P>P*, what happens with customers and producers? do we have excess supply or demand?
excess supply because there is too much of a good that is lying around not being bought. producers are willing to accept a lower price to sell the. producers compete with each other by offering discount to make P do down until P=P*
what is the only thing that can induce a mvmt along the demand curve of a good?
a change in the price of that specific good
give examples of factors affecting demand
- price of other goods
- revenue (income)
give examples of factors affecting supply
- input prices (wages, raw material)
- technology (technology improvements lead to lower production costs)
what are the 3 steps to analyze shocks?
- what is the impact of the shock on the demand curve
- what is the impact of the shock on the supply curve
- using step 1&2, determine how market equilibrium is affected
what does the demand reflects for consumers?
demand reflects the marginal valuation that consumers attach to a good
what does the supply reflects for producers?
supply reflects the marginal costs that producer attach to a good
what happens when there is a negative demand shock?
shift of the demand curve to the left: the equilibrium qty and the price go down
what happens when there is a positive demand shock?
shift of the demand curve to the right: the equilibrium qty and the price go up
what happens when there is a negative supply shock?
upward shit of the supply curve: equilibrium qty decreases and price increases
what happens when there is a positive supply shock?
downward shit of the supply curve: equilibrium qty increases and price decreases
what happens when there is combined shock (shift in S and D simultaneously)
When considering both a price and supply change, you can expect that the direction of either the price or the quantity change will be ambiguous (you can see it by the magnitude change in the curves you draw).if the graphs disagree in one dimension (price or qty), then the overall change is ambiguous and cannot be determined without quantitative information
considering a regulatory shock of a price cap/ceiling going down, what happens to the demand and supply?
excess (surplus) demand and shortages in supply
considering a regulatory shock of a price cap/ceiling going up, what happens to the demand and supply?
excess (surplus) supply and shortages in demand
considering a regulatory shock of a price floor of a wage above minimum wage what happens to the demand?
excess (surplus) supply of work and shortages in demand of hiring = unemployment
what does welfare represents?
wellbeing, satisfaction
in equation, what is welfare equal to?
welfare = consumer surplus + producer surplus
what is the definition of consumer surplus?
difference between willingess to pay and the price paid
how to compute CS?
CS = total valuation - expenses
graphically, what area consists of the CS of a population?
it is the area below the demand curve and above the price line, up to the qty traded
a price fall increases or decreases CS?
a price fall increases CS
when price rises, are ppl with elastic or inelastic demand more affected?
ppl with inelastic demand are more affected because they are somewhat captive and keep buying the good even though it rises. ppl with elastic demand are less affected by the price increase because their demand is more sensitive to changes in price
when price rises, what can we say about CS of ppl with elastic and inelastic demand?
- if demand is elastic, small decrease in CS
- if demand is inelastic, large decrease in CS
what is the definition of producer surplus?
difference between the selling price of the product and the cost of producing each unit (MC)
how to compute PS?
PS = total selling price - total marginal cost
graphically, what is the area representing the PS of an industry?
the PS of the industry is the area above the supply curve and below the price line, up to the qty traded
a price reduction increases or decreases PS?
a price reduction will decrease the PS
when market is in equilibrium, what can we say about welfare?
it is maximized: it is the point of optimal allocation. there is no other way to improve the situation
what can we say about welfare when Q
welfare is not maximized because of the deadweight loss. we say there are wasted opportunities due to Q*-Q untraded units
what can we say about welfare when Q>Q*?
welfare is not maximized beacause of the deadweight loss. we say there are wasted resources because the units traded above Q* cost more to make than the valuation consumers attach to them
what can we say about the competitive equilibrium?
The competitive equilibrium (P,Q) in which everybody is acting is their self interest : it maximizes welfare. It is ’’pareto efficient’’: no wasted resources and no wasted opportunities. It allocates goods to whoever values them the most
