Competitive Markets Flashcards

Flashcards about the analysis of competitive markets

What are the conditions for perfect competition?

Firms are in perfect competition when the industry has a large number of firms and customers, all firms produce homogeneous/identical products, sellers and buyers have all relevant knowledge and firms can enter & leave without barriers.

What are characteristics of a competitive market?

Focus on profit, diminishing of supply, consumer rivalry, exclusion or inclusion, healthy margins and the ability to charge, informative for the customer, Fewer time delays, reduced external influences, protection of property rights, elevated entrepreneurial opportunity.

How do competitive markets offer similar products?

A competitive market gives consumers many options by offering similar products with different approaches to branding and marketing.

How does a competitive market remove barriers to entry?

In a competitive market, anyone can enter if they have an idea for a product or innovation and research proves the market is ready, with no obstacles to entry.

When is resource use efficient?

Resource use is efficient when we produce the goods and services that people value most highly.

Define resource efficiency.

Resources are used efficiently when no one can be made better off without making someone else worse off.

When does efficient resource allocation occur?

This situation arises when marginal social benefit (MB) equals marginal social cost (MC).

How do we identify efficient allocation of resources?

By comparing Marginal Social Benefit (MSB) and Marginal Social Cost (MSC).

How are choices related to resource efficiency?

Consumers and firms coordinated in market equilibrium determine the efficient use of resources.

What do consumers get along their demand curves?

Consumers get the most value out of their resources.

What is the market demand curve equivalent to?

The market demand curve is the marginal social benefit curve (D=MSB).

What happens to firms value along their supply curves?

Firms get the most value out of their resources.

What is the market supply curve equivalent to?

The market supply curve is the marginal social cost curve (S=MSC).

When does equilibrium in a competitive market occur?

Occurs when quantity demanded = quantity supplied (D = S)

When are allocative efficiencies achieved?

Are achieved when MSB = MSC

Demand (D) (30) > Supply (S) (10) = Price increase

The production will increase to 20,000 = Competitive Market efficient

Supply (S) (30) > Demand (D) (10) = Price decrease

The production will increase to 20,000 = Competitive Market Efficient

MSB (15) > MSC (5)

The marginal pizza is valued more highly than it cost to produce (Under Production)

MSC (15) > MSB (5)

The marginal cost to produced pizza is more than the value that consumers place on it (Over Production)

MSB = MSC

Marginal pizza worth exactly what is cost

What is the difference between value and price?

Value is what we get, price is what we pay.

What is marginal benefit (MB)/Marginal Social Benefit (MSB)?

The value of one more unit of a good or service.

What is willingness to pay?

Determines demand.

What is the conclusion between marginal benefit, willingness to pay, and demand?

Marginal Benefit = Willingness to Pay = Demand

What is individual demand?

The relationship between the price of a good and the quantity demanded by one person.

What is market demand?

The relationship between the price of a good and the quantity demanded by all buyers

What is Consumer Surplus?

The excess of the benefit received from a good over the amount paid for it.

How do you calculate Consumer Surplus?

Marginal benefit minus price (MB – P), summed over the quantity bought.

What is Decreasing Marginal Benefit?

People receive more benefits than they pay for goods and services consumed

Cost

What a firm gives up when producing goods and services

Price

What a firm receives when it sells the goods and services

What is marginal cost?

The cost of producing one more unit of goods and services

What is the minimum supply-price?

The minimum price that producers must receive to induce them to offer one more unit of a goods and services for sale.

Individual Supply

The relationship between the price of a good and the quantity supplied by one producer

What is Market Supply?

The relationship between the price of a good and the quantity supplied by all producers

What is the producer surplus?

The excess of the amount received from the sale of a good or service over the cost of producing or when price exceeds marginal cost.

How to calculate producer surplus

Marginal Cost minus price (MC – P), summed over the quantity sold

In competitive equilibrium, resources

Resources are used efficiently

The gain for consumers

Consumer surplus.

The gain for producers

Producer surplus.

Total gains (consumer and producer)

Total surplus.

In long-run equilibrium

Total surplus is maximized.

Sources Market Failure

Price and Quantity Regulation, Taxes and Subsidies, Externalities, Public Goods and Common Resources, High Transaction Cost, Monopoly

What are price regulations?

Put a block on price adjustments that balance the quantity demand and quantity supplied Lead to underproduction.

What are quantity regulations

That limit the amount that a farm is permitted to produce also leads to underproduction.

How does taxes affect prices and quantity?

Taxes increase the prices paid by buyers and lower the prices received by sellers. lead to underproduction.

How does subsidies affect prices and quantity?

Subsidies lower the prices paid by buyers and increase the prices received by sellers. lead to overproduction.

Externality

A cost or benefit that affects someone other than the seller or the buyer of a good

What are Public Goods?

Goods or services from which everyone benefits and no one can be excluded

What are Common Resources?

Is owned by no one but is available to be used by everyone. Example Fuel, rice, eggs

High transactions Cost

When transaction costs are high, the market might be underproduced

What is a monopoly?

A firm that is the sole provider of goods and services

What is a Price Ceiling?

A government regulation that makes it illegal to charge a price higher than a specified level

What a rent ceiling?

When a price ceiling is applied to a housing market.

What is equilibrium?

Quantity DD = Quantity SS

When rent is set below the rent equilibrium level

Quantity of housing DD > Quantity of housing SS Shortage of housing occurs

Search activity.

The time spent looking for someone with whom to do business.

What is a black market?

An illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed.

What is the inefficiency of a rent ceiling?

The marginal social benefit from housing services exceeds its marginal social cost (MSB>MSC) and a deadweight loss arises

What is a Price Floor?

A government regulation that makes it illegal to charge a price lower than a specified level

What is a minimum wage?

When a price floor is applied to a labor market.

Above the equilibrium wage rate

QLSS > QLDD (Surplus of Labor) = Unemployment

At minimum wage:

Increase job searching. At minimum Wage: Marginal Social Benefit(MSB = D) = $7 Marginal Social Cost (MSC = S) = $5 MSB > MSC = Deadweight Loss occur

TAX INCIDENCE

The division of the burden of a tax between buyers and sellers.