What are the four key characteristics of perfectly competitive markets?
- Standardized Goods
- No Transaction Costs
- Perfect Information
- Participants are Price Takers
These characteristics ensure efficient market operations and optimal resource allocation.
What does the demand curve illustrate?
The relationship between the quantity of a good consumers are willing and able to purchase and its price, holding other factors constant.
According to the law of demand, what happens to quantity demanded as price decreases?
Quantity demanded increases, all else equal.
What are the determinants of demand that can shift the demand curve?
- Number of Consumers
- Consumer Preferences
- Prices of Related Goods (Substitutes and Complements)
- Incomes
- Expectations
A shift in demand occurs due to changes in these factors, moving the entire curve right (increase) or left (decrease).
What does the supply curve depict?
The relationship between the quantity producers are willing to supply at various prices.
What does the law of supply state?
Quantity supplied increases as price rises, assuming other factors remain constant.
What can cause shifts in the supply curve?
- Prices of Related Goods
- Technology
- Input Prices
- Expectations
- Number of Sellers
A shift in supply occurs when these determinants change, shifting the entire curve right (increase) or left (decrease).
What is market equilibrium?
The point where demand equals supply, establishing the equilibrium price and quantity.
What occurs during excess demand in a market?
Price is below equilibrium; quantity demanded exceeds quantity supplied, prompting upward pressure on price.
What is consumer surplus?
The difference between what consumers are willing to pay and what they actually pay.
What is producer surplus?
The difference between the market price and the minimum price producers are willing to accept.
What is total surplus?
The sum of consumer and producer surplus, indicating overall market efficiency.
What is market efficiency?
Achieved when resources are allocated to maximize total surplus.
What is deadweight loss?
The loss of total surplus due to market distortions, such as taxes or price controls.
What is price elasticity of demand (πd)?
Percentage change in quantity demanded divided by percentage change in price.
What are the categories of price elasticity of demand?
- Elastic (>1)
- Inelastic (<1)
- Unit elastic (=1)
- Perfectly elastic (|πd|=β)
- Perfectly inelastic (|πd|=0)
These categories reflect how responsive quantity demanded is to price changes.
What is cross-price elasticity (πx)?
Measures how demand for one good responds to the price change of another.
What does a positive cross-price elasticity indicate?
The goods are substitutes; an increase in the price of one increases demand for the other.
What is income elasticity (πy)?
Measures how demand responds to income changes.
What are the implications of income elasticity for normal and inferior goods?
- Normal goods: Positive (demand increases with income)
- Inferior goods: Negative (demand decreases as income rises)
Luxury goods have elastic income elasticity (>1).
What is the price elasticity of supply (πs)?
Measures how responsive the quantity supplied is to price changes.
What are the effects of a price ceiling?
- Transfer surplus from producers to consumers
- Reduce quantity sold
- Create deadweight loss
A binding price ceiling is set below equilibrium and causes shortages.
What are the effects of a price floor?
- Transfer surplus from consumers to producers
- Reduce quantity sold
- Cause deadweight loss
A binding price floor is set above equilibrium and leads to surpluses.
How do taxes affect market transactions?
Reduce quantity exchanged and generate revenue.
