Unit 8: Supply & Demand Flashcards
What is a price-taker?
A buyer or seller who cannot influence the market price.
What are the key assumptions of a competitive market?
Many buyers/sellers, homogeneous products, perfect info, free entry/exit.
What does the market demand curve show?
The total quantity demanded at each price.
What does the market supply curve show?
The total quantity supplied at each price.
What is market equilibrium?
The price and quantity where demand equals supply.
What happens if price is above equilibrium?
Excess supply → price falls.
What happens if price is below equilibrium?
Excess demand → price rises.
What is price elasticity of demand?
The responsiveness of quantity demanded to a change in price.
What is price elasticity of supply?
The responsiveness of quantity supplied to a change in price.
What is consumer surplus?
The difference between what consumers are willing to pay and what they actually pay.
What is producer surplus?
The difference between the market price and the marginal cost.
When is an allocation Pareto efficient?
When no one can be made better off without making someone else worse off.
What does a tax do to the supply curve?
Shifts it up by the amount of the tax.
What does a subsidy do to the supply curve?
Shifts it down by the amount of the subsidy.
What is a price ceiling?
A legal maximum price, below equilibrium, causing shortages.
What is a price floor?
A legal minimum price, above equilibrium, causing surpluses.
How does perfect competition affect long-run profits?
Firms earn zero economic profit in the long run.
Why is P = MC in perfect competition?
Because firms are price-takers and maximize profit by producing where P = MC.
What is deadweight loss?
Loss of total surplus due to inefficiency (e.g., taxes or price controls).
What role does the ‘invisible hand’ play in markets?
It guides prices to adjust and clear the market.
