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P PM > Section2 > Flashcards

Section2 Flashcards

1
Q

What is a Market?

A
  • A market is a collection of buyers and sellers whose (actual and potential) interactions determine the price of a good.
  • Supply and Demand drive this process.
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2
Q

Types of Goods

A
  • Search goods: Qualities can be assessed before purchase.
  • Experience goods: Qualities discovered after purchase.
  • Credence goods: Qualities cannot be evaluated even after purchase (e.g. health care, repair services, legal and financial advice,
    management consulting).
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3
Q

Types of Markets

A
  • Competitive market: Many buyers/sellers, no price control.
  • Oligopoly: Few sellers, price influence possible.
    -Monopolistic Competition: Many sellers and many buyers.
  • Monopoly: One seller controls price, barrier to entry.
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4
Q

Law of Demand

A

Quantity demanded falls when the price rises, assuming all else is equal.

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5
Q

Demand Function

Formula

A

Q = a – bP

Q: quantity demanded
P: price
b: slope

ΔQ/ΔP= –b

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6
Q

Inverse Demand Function

A

P = (a / b) – (1 / b) × Q
- P as price and Q as quantity
ΔP/ΔQ= -1/b

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7
Q

Market Demand vs. Individual Demand

A

Market demand is the sum of all individual demands for a particular good.
Horizontally

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8
Q

Supply Definition

A
  • Quantity supplied is the amount that sellers are willing and able to sell at a given price.
  • Law of Supply: quantity rises when price rises.
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9
Q

Market Supply vs. Individual Supply

A

Market supply is the sum of all individual supplies for all sellers of a good.
Horizontally

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10
Q

Equilibrium Price

A

The price that balances quantity supplied and quantity demanded, where supply and demand curves intersect.

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11
Q

Price Ceiling

A

= a legal maximum on the price at which a good can be sold
- Non-binding if above equilibrium price
- Binding if below, leading to a shortage
Ex: Rent control

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12
Q

Price Floor

A

= a legal minimum on the price at which a good can be sold
- Non-binding if below equilibrium price
- Binding if above, leading to a surplus
Ex: alcohol price

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13
Q

Elasticity

A

Elasticity measures the response of quantity demanded or supplied to changes in price or other market conditions.
Is a measure of how much buyers and sellers respond to changes
in market conditions
Elasticity of Demand:
 Price elasticity of demand
 Income elasticity of demand
 Cross-price elasticity of demand
Elasticity of Supply:
 Price elasticity of supply

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14
Q

Price Elasticity of Demand

A
  • Measures how quantity demanded responds to price changes.
  • Elastic if greater than 1
  • Inelastic if less than 1.
     Perfectly Inelastic:
    Quantity demanded does not
    respond to price changes.
     Perfectly Elastic:
    Quantity demanded changes
    infinitely with any change in price.
     Unit Elastic:
    Quantity demanded changes by the same percentage as the price.
    =percentage change in quantity demanded/percentage change in price
    The elasticity of demand does not only depend on the slope of the demand curve,
    but also on the prices and quantities.
    The lower part (0) of a downward
    sloping linear demand curve is
    less elastic than the upper part (undendlich)!!
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15
Q

Price Elasticity of Supply

A
  • Measures the responsiveness of quantity supplied to price changes.
  • Elastic: large response
  • Inelastic: small response
    % change in quantity supplied / %change in price
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16
Q

Income Elasticity of Demand

For different types of goods

A

= (∆Q/∆I) * (I/Q)

  • For a normal good: elasticity > 0
  • For a luxury good: elasticity > 1
  • For an inferior good: elasticity < 0
17
Q

Cross Price Elasticity

A
  • Measures the response of demand for one good to changes in the price of another good.
  • Substitutes: positive
  • Complements: negative
  • no effects: “zero” value

Describes the change in the demand of one good “b” in response to a change in
the price of another good “m”.

18
Q

Competitive market (Perfect competition)

A

Many buyers and sellers
High level of competition; No impact on the market price

A perfectly competitive market should satisfy the following assumptions:
 Many buyers and sellers;
 Each buyer and seller has perfect information;
 Buyers and sellers are ‘price-takers’;
 Freedom to entry and exit to and from the market;
 Goods and services are homogeneous;
 Buyers and sellers act independently;
 All costs (private and social costs) and benefits are accounted for.

19
Q

Oligopoly

A

Few sellers and many buyers
Not always an aggressive level of competition; there is the possibility to influence the price
imperfectly competitive markets

20
Q

Monopolistic Competition

A

Many sellers and many buyers
Slightly differentiated products (e.g. market for magazines)
Each seller may set a price for its product
imperfectly competitive markets

21
Q

Monopoly (and Natural Monopoly)

A

One seller that controls the price and many buyers
Barrier to entry the market
Non-competitive market

22
Q

Supply and demand

A

Economists use the model of supply and
demand to analyze competitive markets.
Supply and demand are the forces that
make market economies work.
They determine the quantity of each good
produced and the price at which it is sold.

Keep in mind that in the real wordl, there
are few markets that are close to being
considered competitive markets

23
Q

Movements Along the Demand Curve
vs.
Relations of Two Demanded Goods

A

Assume the price of milk falls (price change):
 More will be demanded because of income and substitution effects.
->The income effect: Assume that incomes remain constant then a fall
in the price of milk means that consumers can now afford to buy more
with their income.
->The substitution effect: Milk is lower in price compared to other
similar products so some consumers will choose to substitute the more
expensive drinks with the now cheaper milk.
vs.
no price change:
 Substitutes: two goods for which an increase in the price of one leads to an
increase in the demand for the other (e.g. pencils and pens, CocaCola and
Pepsi)
 Complements: two goods for which an increase in the price of one leads to a
decrease in the demand for the other (e.g. coffee and sugar, cars and petrol)

24
Q

Market Prices

A

A market price act as a signal about how scarce resources are.
Prices provide a signal to both producers and consumers:
Producers: a high price tells that a product is in demand; a low price indicates that a
good is being overproduced
Consumers: a high price tells to think about their purchases more carefully; a low
price indicates to buy more

The market price should reflect all opportunity costs.
f the price of a liter of gasoline doesn’t include the social cost determined by air
pollution, then the price mechanism doesn’t provide the right signal to
producers and consumers -> no sustainable development.

25
Q

Surplus vs. Shortage

A

Surplus oben und shortage unten and Equilibrium

26
Q

Example: Electricity Spot Market

A

 Spot market: on this market,
electricity is traded on a daily basis for physical delivery the following day (a day-ahead-market)
 Generators (and demand-side) bid prices and quantities
 Transmission System Operator (TSO) creates demand and supply curve and sets the price each ‘hour’

Diagram Explanation:
* Generators supply electricity into a Power Pool.
* Suppliers/Customers (such as businesses and households) purchase electricity from the pool.
The graph in the diagram shows:
* Demand Curve (blue line): Represents the quantity of electricity demanded at different prices. -> horizontally
* Capacity Curve (red stepped line): Represents the supply available at different price levels.
* The intersection of these curves determines the market clearing price in €/MW.

27
Q

Shifts vs. Movements Along the Demand Curve

A

A shift in the demand curve is caused by a factor affecting demand other than a
change in price.
Demand shifts due to:
 Consumer income
 Prices of related goods
 Tastes
 Expectations
 Number of buyers

Shift due to Consumer Income
 As income increases the demand for a normal good will increase.
 As income increases the demand for a luxury good will increase a lot.
 As income increases the demand for an inferior good will decrease, e.g. bus
rides.
Shift due to Prices of Related Goods
 When a fall in the price of one good reduces the demand for another good,
the two goods are called substitutes.
 When a fall in the price of one good increases the demand for another good,
the two goods are called complements.

28
Q

Shifts in the Supply Curve

A

A shift in the supply curve is caused by one or more factors affecting supply other
than price.
Supply shifts due to:
 Input prices
 Technology
 Weather conditions
 Number of sellers

29
Q

Point Versus Arc Elasticity

A

Point elasticity measures elasticity at a point on the demand curve (small changes) The formula is:
= (∆Q/∆P) * (P/Q)
∆=Ableitung

Arc elasticity: Price elasticity of demand over a range of prices
The formula is (midpoint formula):
= (∆Q/∆P) * (PStrich/Q)
= %/%

30
Q

The Price Elasticity of Demand and its Determinants

A

Availability of close substitutes:
 Butter and margarine are easily substitutable…
 No close substitutes to eggs
Definition of the market:
 Narrowly defined market (vanilla ice-cream) have more elastic demand than
broadly defined markets (food)
Time horizon:
 Short-run vs. long-run
Regions, culture, habits

31
Q

Example: Peak and Off-Peak Electricity Demand

A

Cross-price elasticity of demand between off-peak and peak electricity consumption:
* This measures how much the quantity demanded of off-peak electricity changes in response to a change in the price of peak electricity.
* If the elasticity is positive, it suggests that when peak electricity prices rise, people shift their usage to off-peak times.

Graph: Demand and Supply of Electricity
* Vertical Axis (P): Represents the price of electricity.
* Horizontal Axis: Represents the output of electricity per time period.
* D_off-peak: The demand curve for electricity during off-peak hours (e.g., nighttime).
* D_peak: The demand curve for peak hours (e.g., during the day when electricity demand is high).
The supply curve of electricity, which is upward sloping (peak), indicating higher costs as output increases.

Economic Interpretation:
During peak hours (D_peak), demand is high, causing prices to rise.
During off-peak hours (D_off-peak), demand is lower, leading to lower prices.
If the price during peak hours increases, consumers may shift their electricity usage to off-peak times, which is captured by the cross-price elasticity formula.

Electricity providers use this concept to charge higher prices during peak hours to encourage consumers to shift their usage to off-peak periods.

31
Q

Relation Between Total Expenditure, Total Revenue and the Price Elasticity of Demand (all the same meaning?)

A

Total expenditure is the total amount paid by buyers and received by sellers
(total revenue) of a good.
TR = P x Q

When demand is price inelastic (a price elasticity less than 1), price and total expenditure move in the same direction.

When demand is price elastic (a price elasticity greater than 1), price and total expenditure move in opposite directions.

32
Q

Giffen good

A

Increase in price increases demand because of the income effect: if the price of bread
rises, poor workers have less income available for meat and need to substitute with
more bread.

33
Q

Veblen/Snob good

A

People purchase things not because they need them but because they want to impress
others with their purchasing power: if price increases, demand increases.
 Rich people buy certain good because it gives some social prestige.

34
Q

Price Elasticity of Demand

A

Three aspects have to be considered in calculating the elasticity:

 The price and the quantity demanded almost always move in opposite
directions (there are a few exceptions such as Veblen goods).
 Price elasticity of demand are sometimes reported as negative numbers (e.g., in
calculations).
It is also a common practice to simply drop the minus sign and report just
the absolute value, where a large elasticity value implies greater responsiveness
of quantity demanded to price.
 Elasticity has no dimension as it is related to a percentage change and will not
be affected by changing the units of measure.

P PM (16 decks)

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