Chapter 8

Question 1

What does the demand curve represent?

Answer 1

The willingness to pay of buyers

Question 2

As the price increase what happens to the willingness to pay?

Answer 2

It decreases as the demand curve decreases

Question 3

What is the supply curve?

Answer 3

The total quantity that all firms together would produce at any given price
Represent the willingness to accept of sellers (sellers can have different reservation prices)

Question 4

What factors can affect the supply curve?

Answer 4

How much people need to part with books
Takes effort to sell so bellow a certain price it’s not worth it to them
How many goods are brought to market

Question 5

What happens at equilibrium price?

Answer 5

The market clears as supply equals demand

Question 6

What happens if price is set above the equilibrium price?

Answer 6

It’s not a Nash equilibrium as some sellers would benefit from lowering their prices (excess supply)

Question 7

Define a price-taking firm

Answer 7

Can’t benefit from choosing a different price from market price and can’t influence the market price
Demand curve is flat, max profits at MC=P
FIRM CHOOSES QUANTITY NOT PRICE

Question 8

Where on an isoprofit curve would marginal cost (MC) equal profit?

Answer 8

Slope of isoprofit curve is 0

Question 9

What is the market supply curve?

Answer 9

Total amount produced by all firms at each price

Question 10

If firms have identical cost function then…

Answer 10

Market supply curve = market marginal cost curve

Question 11

Where would you find competitive equilibrium?

Answer 11

When all buyers and sellers are price takers

At the prevailing market price, supply = demand

Question 12

What are the characteristics of competitive equilibrium?

Answer 12

All gains from trade are exploited (every consumer willing to pay market cost receives good)

Question 13

When is equilibrium allocation Pareto efficient?

Answer 13

Participants are price takers
Contracts are competitive
Transactions only affect buyers and sellers

Question 14

How is producer surplus calculated?

Answer 14

Profit - cost to produce (WTA)

Question 15

How is consumer surplus calculated?

Answer 15

WTP - what they paid

Question 16

What are exogenous shocks and what do they affect?

Answer 16

Factors that are outside the market study that can shift the entire supply or demand curve (can be cause by technology change, shift in popularity)

Question 17

What would cause market entry?

Answer 17

Existing firms are earning economic rent and cost of entry isn’t high other prices firms may enter market
Results in more product being produced overall causing market shift

Question 18

How can taxes affect supply and demand?

Answer 18

Taxes on suppliers/ consumers shift supply/demand curve as prices are higher at each quantity
They lower consumer surplus and producer surplus
Generate revenue and deadweight loss

Question 19

What do tax incidence depend on?

Answer 19

The relative elasticity of consumers and producers

The less elastic group bears more of the year burden

Question 20

What is a fall in total surplus related to?

Answer 20

Positively related to elasticity of demand

Question 21

What must a market have to be perfectly competitive?

Answer 21

Goods or services being exchanged is homogenous (milk from Tesco is the same as milk from Asda)
Very large number of potential buyers and sellers
Buyers and sellers all act independently of one another
Price information easily available to buyers and sellers

Question 22

What is the law of one price?

Answer 22

All transactions take place at a single price

Question 23

What are the tests used for competitive equilibrium?

Answer 23

Do all trades take place at the same price

All firms selling goods at a price equal to marginal cost