Unit 8.1 - Supply and Demand: Price Taking and Competitive Markets Flashcards
What is Market Equilibrium
A point in supply and demand where they meet and the market clears;
Consumers maximise utility, given their budget constraint
firms maximise profit, given their demand constraint
Equilibrium is self-perpetuating, unless a change is introduced
What is Competitive Equilbrium
An equilibrium in which all buyers and sellers are price takers
What forces a firm to be a price taker
If the firm is:
- Small relative to the size of the market
- Selling an identical (homogeneous) product to the rest of the market
What does the marginal cost curve represent for a price-taking firm
The supply curve
When is profit maximised for a set price for price taking firms
When that set price line meets the marginal cost line (supply curve)
What determines the demand curve and the supply curve
Demand is controlled by Willingness to Pay (WTP) and supply is controlled by the firms Marginal Cost curve (MC)
What is zero economic profit
When a firm is earning the same as it would if it put it’s resources into their next best alternative
