Unit 8 - Supply and Demand: Price-Taking and Competitive Markets Flashcards
Define Excess Demand.
A situation in which the quantity of a good demanded is greater than the quantity supplied at the current price.
What is Excess Supply?
A situation in which the quantity of a good supplied is greater than the quantity demanded at the current price.
Describe a Price-Taker.
Characteristic of producers and consumers who cannot benefit by offering or asking any price other than the market price in the equilibrium of a competitive market. They have no power to influence the market price.
Extra Info :) :
Sellers are forced to be price-takers by the presence of other sellers, as well as buyers who always choose the seller with the lowest price.
What is a Competitive Equilibrium?
A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded.
Define a Deadweight Loss.
A loss of total surplus relative to a Pareto-efficient allocation.
Producers would be missing out on potential profits, and some consumers would be unable to obtain the bread they were willing to pay for.
What is price taking?
When the participants are price-takers, they have no market power: the buyer knows that whatever he buys from X-seller, he can find an alternative for a similar price. The seller cannot raise the prices because of competition from the other sellers. Therefore, the suppliers will choose their output so that the marginal cost (the cost of the last unit produced) is equal to the market price.
(–> when it comes to selling the same good)
What is Consumer surplus?
consumer surplus = sum of WTPs − sum of prices paid
the amount of money one did not spend whilst being ready to spend it on a good
Define Producer surplus.
producer surplus = sum of prices received − sum of MCs of each unit
(profit)
Describe the Total surplus.
total surplus = sum of WTPs of consumers − sum of MCs of producers
(Then when we calculate the total surplus, the prices paid and received cancel out)
Define a Perfectly Competitive Equilibrium.
Such an equilibrium occurs in a model in which all buyers and sellers are price-takers. In this equilibrium, all transactions take place at a single price. This is known as the law of one price. At that price, the amount supplied equals the amount demanded: the market clears. No buyer or seller can benefit by altering the price they are demanding or offering. They are both price-takers. All potential gains from trade are realized.
