unit 8

Question 1

WTA

Answer 1

the reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high

Question 2

reservation price

Answer 2

the lowest price in which someone is willing to sell a good

Question 3

supply curve

Answer 3

the curve that shows the number of units of output that would be produced at any given price. For a market, it shows the total quantity that all firms together would produce at any given price.

Question 4

competitive equilibrium

Answer 4

interaction of supply and demand determines a market equilibrium in which both buyers and sellers are price-takers

Question 5

excess demand

Answer 5

when quantity demanded is greater than quantity supplied at a given price level

Question 6

equilibrium price / market-clearing price

Answer 6

price where supply = demand

Question 7

price takers

Answer 7

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

Question 8

price - taking firm

Answer 8

A price-taking firm maximizes profit by choosing a quantity where the marginal cost is equal to the market price (MC = P) and selling at the market price P

Question 9

market supply curve=

Answer 9

market’s marginal cost curve

Question 10

exogenous

Answer 10

coming from outside the model rather than being produced by the workings of the model itself

Question 11

cost of entry

Answer 11

Startup costs that would be incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and the cost of finding and hiring staff.

Question 12

tax incidence

Answer 12

The effect of a tax on the welfare of buyers, sellers, or both.

Question 13

ad valorem tax

Answer 13

tax levied as a percentage of the price

Question 14

specific tac

Answer 14

tax levied as a fixed amount per unit of good

Question 15

perfect competition

Answer 15

characterised by lots of buyers and sellers selling homogeneous product, perfect information, normal profits. price-takers

Question 16

perfect competition equilibrium

Answer 16

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.

Question 17

law of one price

Answer 17

Holds when a good is traded at the same price across all buyers and sellers. If a good were sold at different prices in different places, a trader could buy it cheaply in one place and sell it at a higher price in another.