Understanding Markets 2 Flashcards
A market is …
an arrangement through which buyers and sellers make transactions
What are the sides to a market?
Demand and supply
What are the 4 market dimensions?
Location - may not be a specific geographic location
Price - unit price
Quantity
Time
What is demand in a product market?
amount that consumers
(households) want to buy over a given period in time
What 4 factors affect demand
– The product’s own price
– The price of other products
– Household incomes
– Consumer tastes/preferences
What is the ceteris paribus assumption
examine changes in each
factor, assuming other factors do not change
What happens to the demand curve of product A if household incomes rise?
Shifts right
In a product market, supply is
the amount that producers
(firms) want to sell over a given period in time
Supply depends on what 3 factors
- The product’s own price
– Production costs and technology
– The number of firms operating in the market
What happens to the supply curve if the wage costs fall?
Shifts right
What happens at equilibrium price?
Everyone who wants to buy the good at that price can find a seller willing to sell it
At the equilibrium quantity, firms can
find a buyer willing to
pay the marginal cost for everything they are producing
What happens to price and quantity when something affecting demand changes?
Price and quantity change in the same direction
What happens to price and quantity when something affecting supply changes>
Price and quantity change in opposite directions
Own-price elasticity of demand is
A relative measure of how quantity responds to price changes
How to calculate own-price elasticity of demand
%change in quantity demanded/ %change in price
How does the relationship between quantity and price change in elastic demand?
%change in quantity is greater than %change in price
How does the relationship between quantity and price change in inelastic demand?
%change in quantity is less than %change in price
How does the relationship between quantity and price change in unit elasticity?
%change in quantity equals %change in price
What does inelastic demand imply?
A big change in price leads to
a small change in the quantity demanded
The own-price elasticity is a negative number, because
a change in price leads to a change in demand in the opposite direction
Are substitutes positive or negative?
Positive
Are complements positive or negative?
Negative
%change in quantity supplied over %change in price is always _____
Positive
The longer the period of time considered, the greater
the potential responsiveness of supply and demand
Why is demand more elastic in the long run?
consumers can adjust their behaviour and switch to alternative products
Why is supply more elastic in the long run?
new firms can enter the market, existing firms can adjust their capacity or leave the market
The short run is a period during which
the number of firms
operating in the market is fixed
How do firms operate in the short run?
with fixed capital capacity
and given technology
How can firms adjust production in the short run?
Employing more or fewer workers
The long run is a period during which
existing firms can alter capacity, technology can change and firms can enter and leave the industry
