Price Formation in Different Markets

Flashcards on Price Formation in Different Markets

Market

The place where supply meets demand and where prices are established.

Market Power

Ability to influence the price in the marketplace by controlling the level of supply, demand, or both.

Polypolistic Market

A market with many sellers and buyers, where a single participant has a small market share and influence.

Oligopolistic Market

A market with few sellers and/or buyers, where each oligopolist has a large market share and influence.

Monopolistic Market

A market with only one seller and/or buyer, where a monopolist has the whole market share and absolute market power.

Bilateral Polypoly

Also referred to as the 'perfectly competitive market' or as 'pure competition.'

Price Formation Process

Sellers provide the minimum price they want to achieve and the quantities they are offering; buyers quote the highest price they are willing to accept and the quantities they intend to buy at this price.

Principle of the Highest Executable Volume

The price that results in the most orders that can be executed.

Equilibrium in Market

At the equilibrium price, suppliers plan to sell a certain quantity and demanders plan to buy the same quantity.

Market Equilibrium

The point where supply and demand curves intersect, indicating market equilibrium.

Demand and Supply Functions

Relationships between the quantity demanded or offered of a good and its price.

Equilibrium Condition

The point where both supply and demand functions are equal.

Perfect Market

A market where all firms offer identical products and market participants do not have preferences

Homogeneity of goods

All firms offer identical products

No personal preferences

Buyers are not prepared to pay a higher price to a particular seller

Complete transparency

There is an adequate market transparency

Signalling and Information Function

The price informs about the scarcity of a good.

Steering/Allocation Function

The price directs the factors of production to those areas where they can be used most productively.

Balancing and plan coordination function

The price matches the supply and demand plans on each other.

Distribution function

Prices help to allocate the quantity supplied to buyers who are demanding the goods.

Incentive function

The price offers an incentive to use scarce goods sparingly.

Selection function

The price sanctions underperforming companies and drives them out of the market.

preference-forming effect

Facts that do not cause different behaviors on the market

Heterogeneous goods

Goods that are not of the same kind

Market transparency

All information is available at all times for all

Temporal preferences

Shorter delivery times

consumer surplus

The difference between the maximum price a consumer (buyer) is willing to pay and the actual price they do pay

producer surplus

The difference between the amount producers (suppliers) get for selling a good and the amount they want to accept for that good

Excess supply

When market started with price of 1.30, excess supply of 6000

Excess demand

When the market started with price of 0.70, excess demand of 6000

Ceiling Price

Non-market-based measure, can be introduced on the market.

Total welfare, social surplus or economic surplus

The area between the supply curve and the demand curve, the sum of producer surplus and consumer surplus represents the net gain to society

distort the functioning of the market price mechanism

Non-market-based measures

maintain the functioning of the market price mechanism

market-based measures

Subsidies or transfer payments

payments from the government and do not have to return any economic compensation

value tax

levy of a specific percentage as taxation of the value of the good involved in the transaction

quantity tax

firm must pay a specific contribution to the state for each unit of the sold good

A quantity tax

An increase in producers unit cost

Consequences of a subsidy

A firm gets a higher income than the market would permit from sales revenues.

consumer and producer surplus

the welfare change for the buyers and sellers of the taxed agricultural product

Introducing or raising quantity taxes

leads to a price rise and fall in output (price and quantity effect).

Reno Nevada market

A publicly financed study showed the monthly willingness to pay for this kind of housing as well as the minimum expected rent of flat owners.

Maximum prices (ceiling prices)

lead to an excess of demand and a significant reduction in total welfare