Unit 8.1 - Supply and Demand: Price Taking and Competitive Markets

Question 1

What is Market Equilibrium

Answer 1

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

Question 2

What is Competitive Equilbrium

Answer 2

An equilibrium in which all buyers and sellers are price takers

Question 3

What forces a firm to be a price taker

Answer 3

If the firm is:

• Small relative to the size of the market
• Selling an identical (homogeneous) product to the rest of the market

Question 4

What does the marginal cost curve represent for a price-taking firm

Answer 4

The supply curve

Question 5

When is profit maximised for a set price for price taking firms

Answer 5

When that set price line meets the marginal cost line (supply curve)

Question 6

What determines the demand curve and the supply curve

Answer 6

Demand is controlled by Willingness to Pay (WTP) and supply is controlled by the firms Marginal Cost curve (MC)

Question 7

What is zero economic profit

Answer 7

When a firm is earning the same as it would if it put it’s resources into their next best alternative