Competitive Markets: Supply, Demand, and Government Policies

Comprehensive vocabulary flashcards covering competitive market fundamentals, demand and supply equilibrium, firm behavior, welfare analysis, taxes, subsidies, and price controls.

Competitive Market

A market with many buyers and many sellers of the same good, where competition is intense and no individual participant possesses market power.

Willingness to Pay (WTP)

The maximum price an individual buyer is willing to spend for a good, determined by how important they consider the good and their available resources.

Demand Curve

A downward-sloping curve illustrating that as the price of a good increases, the quantity demanded decreases.

Supply Curve

An upward-sloping curve illustrating that as the price of a good increases, the quantity supplied increases.

Equilibrium Price

The market-clearing price at which the quantity demanded by buyers exactly equals the quantity supplied by sellers.

Excess Supply

A market condition occurring when the price is higher than the equilibrium price, causing the quantity supplied to exceed quantity demanded and leading sellers to lower prices.

Excess Demand

A market condition occurring when the price is lower than the equilibrium price, resulting in more buyers than sellers and incentivizing buyers to offer higher prices.

Price Taker

A buyer or seller in a competitive market who observes the prevailing market price and decides how much to buy or sell, possessing no ability to influence that price.

Competitive Firm Demand Curve

A perfectly elastic (horizontal) demand curve at the market price faced by an individual seller, meaning the firm can sell any quantity at the market price but loses all sales at a higher price.

Competitive Firm Profit-Maximizing Condition

The output level where market price equals marginal cost ($P = MC$), because a competitive firm's marginal revenue is equal to the market price ($MR = P$).

Market Supply Curve

The curve obtained by horizontally summing the quantities supplied by all individual producers at each price, also representing the marginal cost for all units produced in the market.

Gains from Trade

The total economic surplus generated by voluntary market transactions, measured as the sum of consumer surplus and producer surplus.

Pareto Efficiency

An economic allocation where total surplus is maximized, such that no participant can be made better off without making someone else worse off.

Equity vs. Efficiency

The distinction showing that while competitive market forces can maximize the total gains from trade (efficiency), they do not ensure a fair or equal distribution of resources (equity).

Movement along a Curve

A change in the quantity demanded or supplied caused exclusively by a change in the good's own price.

Demand Shift

A shift of the entire demand curve caused by non-price determinants, including changes in consumer income, prices of related goods, consumer tastes, or expectations.

Supply Shift

A shift of the entire supply curve caused by non-price determinants, including changes in input prices, technology, expectations, or natural factors.

Tax Incidence

The division of the tax burden between buyers and sellers, which falls disproportionately on whichever side of the market is more price inelastic.

Deadweight Loss (DWL)

The reduction in total economic surplus caused by market interventions (such as taxes, subsidies, or price controls) that prevent buyers and sellers from realizing mutually beneficial trades.

Subsidy

A government payment made to producers per unit sold or consumers per unit bought, designed to lower consumer costs, increase producer revenues, and expand transaction volume.

Price Ceiling

A government-imposed legal maximum on the price at which a good or service can be sold.

Binding Price Ceiling

A price ceiling set below the equilibrium price, resulting in persistent shortages, deadweight loss, and non-price rationing.

Non-Price Rationing

Any allocation mechanism used to distribute scarce goods to consumers based on criteria other than price, arising due to shortages under binding price ceilings.

Price Floor

A government-imposed legal minimum on the price at which a good or service can be sold.

Binding Price Floor

A price floor set above the equilibrium price, resulting in a persistent surplus of the good, economic inefficiency, and deadweight loss.

What happens when demand doesn’t equal supply?

The number of units sold is equal to the minimum
between the demand and the supply, at the given price.

Price a: where does it cross demand curve

Price b: where does it cross supply curve