Week 8 key definitions

Question 1

Price-taker

Answer 1

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. They have no power to influence the market price

Question 2

Competitive equilibrium

Answer 2

A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded.

Question 3

Exogenous shock

Answer 3

A sharp change in external conditions affecting a model.

Question 4

Perfectly competitive equilibrium

Answer 4

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.