Unit 11: Market Dynamics Flashcards
What causes market equilibrium to shift?
Exogenous changes in supply or demand.
How does the market reach equilibrium?
Through rent-seeking behaviour on the short side of the market.
What is an economic rent?
Income received beyond the next best alternative.
What is the difference between short-run and long-run equilibrium?
Short-run: fixed number of firms; Long-run: firm entry/exit leads to P = MC = AC.
Why is supply more elastic in the long run?
Because more firms can enter the market.
Why do oil prices fluctuate sharply in the short run?
Due to short-run inelasticity of both supply and demand.
Why do people buy financial assets?
To use them or sell them later for profit.
What determines a bond’s price?
Its fixed payments and the prevailing interest rate (inversely related).
What are stocks?
Claims on a firm’s future earnings, with no fixed payment schedule.
What is systematic risk?
Risk that affects the whole market; undiversifiable.
What is idiosyncratic risk?
Risk unique to a specific asset; can be diversified away.
What is the market capitalization rate?
The return investors demand for holding a risky asset.
What is an asset bubble?
A sustained deviation of asset prices from their fundamental value.
What causes bubbles to grow?
Positive feedback loops from momentum trading and resale expectations.
What is a stable equilibrium?
One that restores itself after a disturbance.
What is an unstable equilibrium?
One that magnifies disturbances and moves away from equilibrium.
What is the Greater Fool Theory?
Buying overpriced assets in hope of reselling to someone else at a higher price.
What is short-selling?
Selling borrowed assets with the intention of buying them back at a lower price.
What are non-clearing markets?
Markets where supply ≠ demand and goods are rationed.
What do price controls like rent ceilings create?
Economic rents and possible secondary markets.
What are stationary economic rents?
Rents that persist in equilibrium, like producer or consumer surplus.
What are dynamic economic rents?
Temporary rents that occur during market disequilibrium.
How can economic rents be productive?
By encouraging employment, innovation, and investment.
