Unit 2 Competitive Markets (Demand & Supply) Flashcards
market
exists when buyers and sellers interact to exchange goods and services
must be present for a market to occur
buyers, sellers
types of markets
local, national, global, factor, product, financial
competitive market
composed of many independent buyers and sellers so no one buyer or seller has control over price
demand
the willingness and ability to purchase an amount of a good or service at a particular price during a time period
individual demand
the demand of the individual person after they have assessed the marginal costs and marginal benefits
market demand
the sum of all individuals’ demand
hypothesis
statement on a possible relationship
theory
consistent hypothesis
law
a theory that is never refuted
law of demand
as the price of a good increases, the quantity demanded of the good falls, and as the price of a good decreases, the quantity demanded of the good rises, ceteris paribus
type of relationship between price and quantity demanded
inverse casual
why the demand curve is downward sloping
decreasing marginal benefit, substitution effect, income effect
substitution effect
when consumers begin to consume a cheaper alternative due to a price increase
income effect
if the price increases, consumers’ real income is lowered as they can only afford a certain amount
what causes movement along the demand curve
price changes
what causes a shift of the demand curve
non-price determinants
non-price determinants of demand
household income, future price expectations, price of substitutes, tastes and preferences, population/demographic changes
normal good
demand rises as income rises and vice versa
inferior goods
demand falls as income rises and vice versa
supply
willingness and ability of producers to produce an amount of a good/service at a particular price during a particular time period
law of supply
an increase in price results in an increase in quantity supplied, ceteris paribus
relationship between price and quantity supplied
direct/positive
what causes movement along the supply curve
when the price of the good and the quantity supplied changes
individual supply
the quantity supplied of an individual producer
market supply
the sum of all individual firm’s supply
why quantity supplied and price have a direct relationship
profit effect, cost effect
profit effect
sellers want to make as much money as possible, higher price equals higher profit
cost effect
costs per unit will increase with the rise of quantity supplied; producers will only produce them when the per unit price is higher
what causes a shift of the supply curve
changes in non-price determinants
non-price determinants of supply
FOP’s price changes, technology changes, price of related goods (competitive, joint supply), expectation of prices changes, number of firms, government action, shocks
if the FOP’s price increases, the good will become _____ profitable and the supply curve will shift to the _____
less, left
if the FOP’s price decreases, the good will become _____ profitable and the supply curve will shift to the _____
more, right
what causes a shift left of the supply curve
decrease in supply
market equilibrium
a market state where the supply in the market is equal to the demand in the market
excess demand
a shortage of goods e.g. a shortage of rental properties will increase rent prices in all properties
excess supply
a surplus (glut) of goods available will decrease the price e.g. excess of rental properties available will decrease rent prices
factors that create new market equilibriums
changes in the non-price determinants of supply and demand
demand increases, supply increases
price is uncertain, quantity increases
demand increases, supply decreases
price increases, quantity is uncertain
demand decreases, supply increases
price decreases, quantity is uncertain
price mechanism
a system of interdependence between supply and demand of a good and its price
what the price mechanism does
sends the price up when there is excess demand/shortages and down when there is excess supply/surpluses
signal/incentive of price increase to producers
shortage of goods, more must be produced
signal/incentive of price increase to consumers
the good is more expensive, demand decreases
rationing
how to distribute something amongst people
consumer surplus
the maximum price a consumer is willing to pay - the price the consumer pays
what the demand curve also represents
marginal benefit curve
marginal benefit
the additional satisfaction/utility that a person receives from consuming an additional unit of a good/service
producer surplus
the price received by firms for selling their good - the lowest price that they are willing to accept to produce the good
vertical distance to demand curve
marginal benefit
vertical distance to supply curve
marginal cost curve
marginal cost
the change in the total cost that arises when the quantity produced is incremented by one unit
social (total) surplus
a measure of the well-being of a society, maximization of social surplus and welfare is desirable in society
allocative efficiency
achieved if society is getting the goods and services it wants; marginal benefit = marginal cost
behavioral economics
system which questions rational consumer choices
availability
most recent information that influences how we think and what we decide e.g. bird flu outbreak on the news
anchoring
relying on the first information heard, when prices are presented a certain way e.g. 99 cents, half price
framing
the way information is presented makes the good appear more positive e.g. yogurt 90% fat free
“Rule of thumb”
making decisions with quick, practical thinking
rationality bound
we do not have the amount of information/time and cognitive skills to make rational decisions
self-control bound
we don’t have perfect self control, and often give into temptations
selfishness bound
we do not always act in our own self-interest, we care about the wellbeing of others
perfect information bound
we don’t always get the most accurate information about products, or we’re unable to process it all
choice architecture
the idea that choices can be packaged and presented in ways that manipulate decisions
default choices
when we do not think about something and fall back onto what we always do e.g. Google
restricted choices
when you give people choices but it is weighted towards one of the choices e.g. apples in McDonald’s
mandated choices
when you make a decision required by law e.g. ticking the organ donor box Y/N when getting a driver’s license
who created the nudge theory
richard thaler
nudge theory
a belief that consumers can be encouraged to make decisions that are better for them and society e.g. placement of fruit at the entrance to a school cafeteria
growth maximization
a strategy pursued by firms wishing to expand the size of the firm with regard to productive capacity
corporate social responsibility
firms may consider that they can gain a market advantage by ensuring social welfare in their economic activity
satisficing
firms are complex with competing objectives, therefore the goals of the company may be compromised
productive efficiency
refers to producing goods with the fewest resources possible (producing at the lowest cost)
social surplus occurs when
MB = MC
