Week 9 Flashcards
What is a reservation price?
The seller’s willingness to accept the sale of a good or service
What is demand based upon?
Consumer’s willingness to pay (WTP) for a good or service which is linked to how much they value the good or service and their ability to pay
Who came up with the model of supply and demand?
Alfred Marshall
What is the equilibrium price?
A point where both demand (consumers) and supply (sellers) can satisfy their needs given their feasible set or market restrictions. Prices tend to gravitate toward this price to minimise excess supply.
Note: This is where the market clears
What is equilibrium on the demand and supply graph?
Where demand and supply are equal and there is no tendency to change
What is competitive equilibrium?
When both buyers and sellers are price takers (identical goods being traded) and competition eliminates bargaining power giving suppliers no ability to markup prices.
What is a key difference between the differentiated product market and competitive non-differentiated product markets?
Differentiated product markets have a dead-weight loss zone because there is a region between the set price point and the equilibrium of MC and D where there are not enough consumers WTP to satisfy this gap. This allocation is also not Pareto efficient because there is a demand that is unfulfilled but could be fulfilled with appropriate arrangements.
In a non-differentiated product, competitive market, there is NO deadweight loss and prices are Pareto efficient. This is because everyone with a WTP > MC will have fulfilled demand.
Why won’t a firm lower their price to eliminate DWL if they are selling a differentiated product?
They have market power to dictate the price that maximises their profits, so even if they cannot fulfil all demand where WTP > MC, it doesn’t matter because they will set and fix their price at a point that leads to profit maximisation, not demand maximisation.
Where do price-taking firm’s maximise profits?
Where MC = Price
