ECON 1020 - foundations market equilibrium, consumers and firms

market

a situation in which buyers and sellers exchange goods and services with the price adjusting to how much the consumers want to buy (demand) and how much the sellers want to sell (supply).

what does it mean for a market to be in equilibrium?

If the price is too high, the consumers demand less whilst the sellers want to sell more. This results in a surplus (pushes the price down). Likewise, if the price is too low, the consumers want to buy more whilst the sellers want to sell less, resulting in a shortage (pushes the price up). At equilibrium, quantity demanded = quantity supplied; there is no surplus or shortage, so there is no reason for the price to change.

explain why prices rise if there is ecess demand and fallw when there is excess supply

with excess demand, buyers compete with each other, allowing the sellers to raise the prices; with excess supply, sellers compete to sell unsold goods, pushing the prices down.

what is the difference between change in demand and change in quantity demanded

change in demand is caused by factors other than price (shift of the demand curve); change in quantity demanded is caused by the goods own price (movement along the demand curve)

factors affecting demand and causing a shift in the demand curve

income, population, trends, price of substitutes and complements

list fators affecting supply causeing a shift in the supply curve

input costs, technology, taxes and subsides, number of firms.

what are prefrences

how consumers rank different bundles of goods bases on satisfaction or utility.

transitive preference

if they prefer a to b and b to c then they must prefer a to c

what is a budget constraint

combination of goods which a consumer can afford given their income and the prices

interior optimum means

consumer chooses positive amounts of all goods and spends their entire budget.

at an interior optimum what condition must hold?

marginal rate of substitution = price ratio

explain the diffence between income and substitution effects when price falls

substitution: good becomes relatively cheaper so consumption increases. income: the consumer feels richer and consumers more of normal goods

what is an individual demand funtion

shows how much of a good an individual chooses to consume at each price, ceteris paribus.

how is market demand derived from individual demand

it is the horizontal sum of the individual deman curve.

what is a firms objectiv ein microecon

maximise profit

what condition characterises profit maximisation for a competitive firm

price = marginal cost

shutdown condtion in the short run

a firm shutsdown if the price is less than average variable cost.

short run vs long run

short run has at least one fixed output; in the long run, all inputs are variable and firms can enter or exit.

a tax is imposed on a producer what happens ?

supply curve shifts left, price consumer pays rises, and the quantity traded falls.

why does tax create a deadweight loss

because mutually beneficial trades no longer occur due to tax wedge between the price buyers pay and sellers recieve.

how is tax burden determined

relative elasticities of demand and supply

what is elasticity

measures how responsive a quantity is to change in the price or any other variable

when is demand elastic

when the percentage change in quantity is smaller than the percentage change in price