Chapter 2 - Competitive Markets

competition (42)

a process in which rivels compete in order to achieve some objective

competitive markets (42)

composed of a large number of sellers and buyers acting independently, so that no individual seller or small group of sellers can control the price of the product sold

demand (43)

various quantities of a good or service the consumer is willing and able to buy at different possible prices during a particular time period ceteris paribus

law of demand (44)

negative relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus

market demand (45)

the sum of all indivudla demands for a good

non-price determinants of demand (45/46)

• tastes and preferences

• prices of substitute goods

• prices of complementary goods

• the number of consumers

law of diminishing marginal utility (48)

as consumption of a good increases, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed

substitution effect (48)

if the price of a good falls, the consumer substitutes (buys more) of the now less expensive good

supply (49)

various quantities of a good or service a firm is willing and able to produce and supply to the market for sale at different possible prices, during a particular time period, ceteris paribus

law of supply (50)

There is a positive relationship between the quantity of a good supplied over a particular time period and its price, ceteris paribus. As the price of the good increases, the quantity of the good supplied also increases; as the price falls, the quantity supplied also falls, ceteris paribus

market supply (51)

the sum of all individual firms’ supplies for a good

non-price determinants of supply (52/53)

• cost of FOPs

• technology

• taxes/subsidies

• the number of firms

• producer/firm expectations

• supply shocks

• price of related goods: competitive supply

  • when the firm has to decide between producing two different goods using the same resources. If the price of one final good is reduced, the firm may decide to produce more of the other good if it is more profitable

• price of related goods: joint supply

  • production of goods that are derived from a single product, so it is not possible to produce more of one without producing more of another. For example, skimmed milk and butter are both produced from whole milk

competitive market equilibrium (59)

quantity demanded equals quantity supplied, and there is no tendency for the price to change

marginal benefit (66)

the extra benefit that you receive from consuming an additional unit

consumer surplus (76)

the highest price consumers are willing to pay for a good minus the price actually paid

producer surplus (67)

the price received by firms for selling their goods minus the lowest price that they are willing to accept to produce the good

social surplus (68)

consumer surplus + producer surplus - deadweight loss

maximised at market equilibrium