Microeconomics-Perfectly Competitive Markets

Market

comprised of all the buyers and sellers of a particular good or service

Highly competitive markets

has many buyers and sellers, no one buyer or seller can influence the price or quantity sold, sellers have no incentive to change the price they charge

Perfectly competitive markets

product sold is highly standardized, number of buyers and sellers is large, all participants are well informed about the market price

Law of demand

there is a negative relationship between a good’s price and the quantity demanded

Demand schedule

table listing the quantity of a good that is demanded at different prices

Demand curve

graph showing the relationship between price of a product and the quantity demanded

Market demand schedule

demand schedule based on the combined quantity demanded by every consumer in a market

Demand

the entire demand curve

Factors that affect demand

income, price of related goods, tastes, expectations, number of buyers

Normal goods

goods for which the demand rises when income rises and vice versa

Inferior goods

goods for which demand falls as income rises

Substitutes

goods for which a decline in the price of one good causes a reduction in the demand for another

Complements

goods for which a lower price for one good causes demand for the other good to increase

Law of supply

there is a positive relationship between price and quantity supplied

Factors that affect supply

input prices, technology, expectations, number of sellers

Inputs

anything suppliers have to purchase to supply a product

Equilibrium

state at which no participant in a market has any reason to alter their behavior, defined by the combination of price and quantity where the supply and demand curves intersect

Competitive markets

gravitates toward equilibrium, effective method of allocating resources, price conveys important information to both suppliers and consumers

Marginal buyer

buyer who, at a certain price, is indifferent between buying or not buying a good; their willingness to pay is represented by the height of the market demand curve

Consumer surplus

the benefit consumer receive from buying a product at a price lower than the maximum they would be willing to pay

Total consumer surplus

area below the demand curve and above the market price, measure of how much benefit all the buyers in a market receive from participating in it

Marginal seller

seller who would leave the market if the price were any lower; their willingness to supply is represented by the height of the supply curve

Height of the supply curve

measures the opportunity cost to the marginal seller

Producer surplus

benefit suppliers receive from selling products at a price higher than the minimum they would be willing to sell at

Total producer surplus

area above the supply curve and below the market price

Total surplus

combination of consumer surplus and producer surplus