Competitive Markets: Demand and Supply

These flashcards cover important concepts from the lecture on competitive markets, demand, and supply.

What is the law of demand?

The law of demand states that there is a negative relationship between the price of a good and the quantity demanded, ceteris paribus.

Define market equilibrium.

Market equilibrium occurs when quantity demanded equals quantity supplied, resulting in no tendency for the price to change.

What is consumer surplus?

Consumer surplus is the difference between the highest price consumers are willing to pay for a good and the price they actually pay.

Explain the relationship between individual demand and market demand.

Market demand is the sum of all individual demands for a good.

Define producer surplus.

Producer surplus is the difference between the price received by producers for a good and the lowest price they are willing to accept.

What happens during excess supply (surplus)?

During excess supply, quantity supplied exceeds quantity demanded, leading to downward pressure on prices until equilibrium is reached.

What is the effect of an increase in consumer income on demand for normal goods?

An increase in consumer income generally leads to a rightward shift in the demand curve for normal goods.

Define the non-price determinants of demand.

Non-price determinants of demand include factors such as consumer income, tastes and preferences, prices of related goods, and the number of consumers.

What is the significance of shifting demand curves?

Shifting demand curves indicate changes in market conditions that affect consumer preferences, which can lead to changes in equilibrium prices and quantities.

Describe the effect of a decrease in supply on market equilibrium.

A decrease in supply leads to a leftward shift of the supply curve, resulting in higher equilibrium prices and lower equilibrium quantities.

Explain the concept of 'ceteris paribus.'

Ceteris paribus is a Latin phrase meaning 'all other things being equal,' used to isolate the relationship between two variables.

What is the primary goal of firms under standard economic theory?

The primary goal of firms is profit maximization, where they aim to make the difference between total revenue and total costs as large as possible.

What does the term 'elasticity of demand' refer to?

Elasticity of demand measures the responsiveness of the quantity demanded to a change in the price of the good.

How do consumers make choices according to behavioral economics?

Behavioral economics suggests that consumers do not always act rationally and may be influenced by biases, heuristics, and social norms.

What is the role of prices in resource allocation?

Prices communicate information about scarcity and value, signaling to producers and consumers what and how much to buy or sell, thus aiding in resource allocation.

How can government intervention be justified in markets?

Government intervention may be justified to correct market failures, such as ensuring equitable distribution or addressing negative externalities.

What is the formula for consumer surplus?

Consumer surplus = (Maximum price consumers are willing to pay - Equilibrium price) x Quantity sold.

What is bounded rationality?

Bounded rationality is the concept that individuals make decisions based on a limited understanding of information due to cognitive limitations.

What are the potential benefits of nudging in economic policy?

Nudging can help to influence consumer behavior in socially desirable ways without restricting freedom of choice.

Define the term 'market share.'

Market share refers to the percentage of total sales in a market that is earned by a single firm.

What influences the shifts in supply curves?

Shifts in supply curves can be influenced by changes in production costs, technology, number of suppliers, and government policies.

Explain the significance of the marginal utility theory in economics.

The marginal utility theory explains how consumers derive satisfaction from consuming goods, where utility derived from additional units decreases with each additional unit consumed.