The Market Model Flashcards
Supply and Demand
Assuming that at any given price quantity will be sold.
- Understanding how a changing world economy will affect market prices and production
- Impact of government price control
- Determine how taxes, subsides etc affect consumers and producers
Demand Curve
Shows how much goods buyers want for each possible given price.
Downward Sloping
Inverse Demand Curve
Price at which buyers would demand specific quantities.
- Demand is seen as the ‘willingness to pay’ or ‘marginal benefit’
-^ This decreases with amount demanded
Elasticity of Demand
How much Q is demanded is in response to changing price.
Price Elasticity Demand (PED): % Change in Q demanded in response to 1% change in price.
Elasticity of demand: (change in Q/ change in P) x (P/Q)
- PED < -1, Price Elastic
- -1 < PED < 0, Price Inelastic
- PED = -1, Unit Elastic
Elasticity is NOT the slope of the demand curve
- Perfect Elasticity (straight vertical graph)
Perfect Inelasticity
(straight horizontal graph)
Supply Curve
How much sellers are willing to supply at a possible price.
- It is the inverse function to marginal cost. (MC)
^ MC goes up as Q goes up.
Market Supply = the sum of all individual supply
Elasticity of Supply = (change in Q/ change in P) x (P/Q)
- PES > 1, elastic
- PES < 1, inelastic
If there’s an:
Increase in cost of a good = shift upwards to the left
Decrease in cost of a good = shift downward to the right
Complements in Supply
When goods are jointly produced, therefore, if supply in good X increases, supply in good Y increases
Market Equilibrium: Excess supply
Excess supply is seen above the market equilibrium.
This is when there is more supply than demand - downward pressure until equilibrium is reached
- Sellers compete to lower prices and get rid of excess stock
(happens over a long period of time)
Market Equilibrium: Excess Demand
Excess demand is seen below the market equilibrium
This is when there is more buyers than sellers - upward pressure until equilibrium is reached
- Buyers compete to push price up
(happens over a long period of time)
Rationing Function
Prices determine who gets Q of resources based on their willingness to pay
Allocative Function
Prices act as a guiding resource, guiding producers when to increase or decrease production
Pareto Effect
Not possible in Market Equilibrium for someone to be better off w/o others being worser off.
- The benefit of ME lies on the society and not the distributor
Welfare Properties of M.E.
Total Welfare = Consumer Surplus + Producer Surplus
- CS (benefit on consumers from buying a good)
- PS (benefit on producers from selling a good)
Price Ceiling + Floor
Ceiling = legal limit on the max price of a good, set below the market price
Floor = legal limit on the minimum price of a good, set above the market price)
