lecture 7 - supply and demand, competitive markets

Question 1

what is a price taker?

Answer 1

someone who accepts whatever the market price is
they have no market power to charge a different price
no control to dictate the price of a good/service

Question 2

what is everyone considered in perfect competition?

Answer 2

a price taker

no one has market power

Question 3

what is meant by the pareto efficient?

Answer 3

economy which only sells one good
only way to make someone better off is to give them more of that good, without meaning someone else is worse off
most markets are pareto inefficient

Question 4

what can constrain buyer and sellers to be price takers?

Answer 4

competition

Question 5

what determines market equilibrium?

Answer 5

supply and demand

Question 6

what does competitive equilibrium mean?

Answer 6

occurs when all buyers and sellers are price takers

supply = demand (= market clearing

Question 7

what is demand based on?

Answer 7

willingness to pay

Question 8

what is supply based on?

Answer 8

willingness to accept

Question 9

how do price and quantity change in competitive equilibrium?

Answer 9

in response to supply and demand shocks

Question 10

how is the real world market different to the model of perfect competition?

Answer 10

model - describes ideal condition in which everyone is a price taker
real - some firms have more power than others, examples would be monopolies

Question 11

what is a monopoly?

Answer 11

the exclusive supply or trading of a service/good

Question 12

what are the properties in a perfect competitive market?

Answer 12

• good/service being homogenous (cannot be distinguished form others) / perfect subistutes
• very large number of buyers and sellers
• free entry and exit form market
• price info is easily available
• profit maximisation is key objectiev

Question 13

what is the feasible set?

Answer 13

set of goods that consumer can afford to purchase

e.g if part of the isocost curvie is above this set then they are not able to afford it

Question 14

what does the unit specifically look at?

Answer 14

markets and interaction of buyers and sellers

Question 15

what is competition determined by?

Answer 15

consumer preferences and cost of supplier

Question 16

what is the reservation price?

Answer 16

the lowest price in which someone is willing to accept for a service or good

Question 17

how do consumer preferences determine competition?

Answer 17

e.g the difference between someone poor and wealthy
poor - WTP is low and higher WTA
wish - WTP is high and low WTA

if you are no longer in need of the certain good then the WTA may be lower

Question 18

what does a supply curve allow?

Answer 18

allows you to see how much of a good can be supplied at a given price

Question 19

what has modern communication allowed?

Answer 19

advertisement of goods and services for seller
buyers can more easily find out what is available and for the difference prices

many markets are no online rather than face to face
don’t have to buy as soon as you buy you can research around

Question 20

what did alfred marshall do?

Answer 20

created the model of supply and demand

Question 21

what did alfred marshall state in relation to his supply and demand model?

Answer 21

• supply curve is determines y sellers wta
• demand curve by wtp

price demanded would never be very far form the being equal to price supplied

Question 22

what is the equilibrium price?

Answer 22

equality between supply and demand
= market clearing
= supply = demand

Question 23

what happens if price is above price equilibrium?

Answer 23

suppliers would sell large quantities but buyer wouldn’t buy as too expense so create an excel of supply

Question 24

how could sellers benefit if supply not equal to demand?

Answer 24

they could benefit by charging a different price e.g lower so that demand rises
eventually settling at an equilibrium

Question 25

how is alfred marshalls model linked to ceteris paribus?

Answer 25

in the fact that all goods are identical

Question 26

what is nash equilibrium?

Answer 26

a stable state in which no participant can gain from unilateral change (by one person) if others strategies remain the same

Question 27

how is competitive equilibrium an example of nash equilibrium?

Answer 27

no actor can do better than continue what they are doing, accepting equilibrium price as both supply and demand are price takers

Question 28

in the unit who are the sellers?

Answer 28

individual people but also firms

Question 29

when are firms price takers?

Answer 29

when each of the firms is producing identical products meaning that consumers can easily switch who they buy from no benefit to trade different from the prevailing market price

Question 30

what are marginal costs?

Answer 30

the cost of producing one extra unit of good or service

Question 31

when do marginal costs rise?

Answer 31

as production increases | average price falls

Question 32

if price = marginal cost what is the profit?

Answer 32

0

Question 33

when do isoprofit lines slope down?

Answer 33

when price = MC

Question 34

what is a firms supply curve?

Answer 34

equals the marginal cost curve

Question 35

how do you find a supply curve?

Answer 35

you ad up the total amount of seller and what price they will supply at also the same for a market

Question 36

when do firms gain an economic rent?

Answer 36

when the market clearing is at a lower price than where p=MC

Question 37

why do buyers and sellers voluntary engage in trade?

Answer 37

as they both benefit

Question 38

how are mutual benefit sin equilibrium allocation measured>

Answer 38

by consumer and producer surplus

Question 39

what is buyer surplus?

Answer 39

WTP higher than market price

Question 40

what is producer surplus?

Answer 40

marginal cost of production is below the market price

Question 41

what is dad weight loss?

Answer 41

loss in producer and consumer surplus | there is no deadweight loss at equilibrium price

Question 42

when are maximum gains reached?

Answer 42

at equilibrium price

Question 43

what happens in demand curve if demand increases>

Answer 43

it shifts to the right

Question 44

what happens when demand increases?

Answer 44

- dc shifts right - there is an increase in price - leads to an increase in supply - supply curve does not shift but there is movement up the curve - the equilibrium price rises

Question 45

how could supply increases?

Answer 45

due to improved efficiency in supply | new technique means more goods can be made quicker and cheaper leading to a fall in MC

Question 46

what are shifts in supply and demand known as/due to ?

Answer 46

shocks

Question 47

what does an increase in supply lead to?

Answer 47

a fall in price and rise in quantity sold

Question 48

what is an economic shock?

Answer 48

unexpected or unpredictable event that affects an economy | brings changes in economic growth, inflation and unemployment

Question 49

why might supply change?

Answer 49

due to firms entering and exiting a market

Question 50

why might firms enter a new market>

Answer 50

if there is an economic rent

Question 51

what is meant by costs of entry>

Answer 51

costs associated with entering a market such as acquiring equipment

Question 52

what does the entry of new firms mean for existing firms?

Answer 52

they may drive profit down to zero due to increased somepeptive and trading at lower prices eliminating economic rent as market price falls excess of supply if price is not lowered

Question 53

why do governments issue taxes?

Answer 53

for revenue and to effect the location of goods/services in some way for example sugar tax is meant to slow down the trading of products with high sugar

Question 54

if there is a tax what happens to the MC?

Answer 54

if there is a tax on the supply of a product then the MC curve/supply curve rises by the percentage of the tax this creates a deadweight loss (the triangle between the supply demand and original equilibrium price

Question 55

what are the effects of tax?

Answer 55

- consumer surplus falls , pay more and buy less - procure surplus falls , produce less dn receive less - totally surplus falls