Market Dynamics and Equilibrium

These flashcards cover key concepts about markets, demand, supply, and equilibrium from the lecture notes.

What is a market?

A market is an economic setting where buyers and sellers trade a particular good or service.

What are the five assumptions of a perfectly competitive market?

1) Many buyers and sellers. 2) Homogeneous good. 3) Perfect information. 4) Price takers. 5) Free entry.

Why study perfectly competitive markets?

They serve as a benchmark for analysis and help understand basic economic forces.

What is the law of demand?

As the price decreases, the quantity demanded increases, all else being equal.

What is a demand schedule?

A table that shows the quantities demanded at various prices.

What is a demand curve?

A graphical representation of the relationship between price and quantity demanded.

What is the equation for a buyer’s demand curve?

P = b + a*Q where 'a' is the slope and 'b' is the y-intercept.

What is market demand?

The total quantity demanded by all buyers in the market at a given price.

What are complements in economics?

Goods that are used together, where an increase in the price of one decreases the demand for the other.

What are the five non-price factors that shift the demand curve?

1) Consumer preferences. 2) Prices of related goods. 3) Consumer income. 4) Future expectations. 5) Number of buyers.

How does technology affect supply?

Technological improvements can lower production costs, thus increasing supply.

What is market equilibrium?

The point where quantity demanded equals quantity supplied, resulting in a stable market price.

What is the relationship between surplus and equilibrium?

At a surplus, the price is above equilibrium, causing downward pressure on the price.

What happens at a shortage?

At a shortage, buyers are willing to pay more than the equilibrium price, causing upward pressure on the price.

What is price elasticity of demand?

It measures how responsive the quantity demanded is to a change in price.

What defines elastic and inelastic demand?

Elastic is when elasticity > 1 and inelastic is when elasticity < 1.

What effect do substitutes have on demand?

An increase in the price of one substitute leads to an increase in demand for the other.

What do the supply and demand curves represent in a market?

The supply curve shows the minimum price for a quantity supplied, while the demand curve shows the maximum price for a quantity demanded.

What is the difference between a movement along the curve and a shift of the curve?

Movement is caused by a change in price, while a shift is caused by non-price factors affecting demand or supply.