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What makes a perfect competition market?
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Law of demand
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Microeconomics 1
Consumption and Production
| Question | Answer |
|---|---|
| What makes a perfect competition market? | Homogeneous goods, No entry/exit barrier, Many demanders and suppliers, Price takers (price), Perfect information. |
| Law of demand | Demand slope is always negative. |
| Law of supply | Supply slope is always positive |
| Absolute price | The price "per se" of a good |
| Relative price | The price of a good compared to the price of other good. (With the same money, what ratio of good 1 can you buy compared to good 2). I.E.: 1kg bread-2€/1kg meat-10€ Relative price of bread-meat is 0,2. With 2€ you can buy 1kg of bread or 0,2 kg of meat. |
| Reservation price | The maximum value I'm willing to pay for a good |
| Demand | The quantity of a good I'm willing to buy for all prices |
| Supply | The quantity of a good I'm willing to sell for all prices |
| Factors that affect DEMAND | 1.Price 2.Preferences/Taste 3.Income 4. Substitutes/complementary goods 5. Number of consumers 6. Expectations |
| How does the price (1) affect the demand curve? | The price does not affect in the curve, it just moves along the slope. Higher price=lower demand and viceversa |
| How does the preferences/taste (2) affect the demand curve? | The curve shifts to the right if the good is now more liked because for the same prices there are more buyers now. If disliked the curve shifts left, for the same price there are less buyers |
| How does the income (3) affect the demand curve? | An increase of income shifts the curve to the right, same price more buyers. A decrease of income shifts the curve left, same price less buyers |
| How does the related goods (4) affect the demand curve? | Substitutes: If the price of butter increases, the demand of margarine increases. Complements: If the price of petrol icreases, the demand of cars decreases |
| How does the number of consumers (5) affect the demand curve? | With a rise in the nº of consumers, the curve shifts right, same price, more buyers. If the nº of buyer decreases, same price less demand |
| How does the expectations (6) affect the demand curve? | Depending on expectations, future changes in income, future change in price of the good, future complement/substitute going out, future change in number of consumers, will shift the curve right or left depending on the scenario. |
| Factors that affect SUPPLY | 1. Price 2. Technology 3. Input prices (cost of production) 4. Prices of related goods (substitutes/complements) 5. Nº of producers 6. Expectations 7. Other (industry specific) factors |
| How does the price (1) affect the supply curve? | The price does not affect in the curve, it just moves along the slope. Higher price=higher supply and viceversa |
| How does the technology (2) affect the supply curve? | Technological advancements, make the cost of production decrease so the curve shifts right, same price more producers. |
| How does the inut price (3) affect the supply curve? | If the cost of production increases the supply curve shifts left, same price less production. If the cost of production decreases the curve shifts right, same price more production |
| How does the price of related goods (4) affect the supply curve? | Substitutes: if the price of a substitute (y) increases and it becomes more profitable to produce it than x so the x supply curve shifts left. Viceversa Complements: If complements price increases the supply curve of x shifts to the right. Viceversa |
| How does the nº of producers (5) affect the supply curve? | If the number of producers increase the curve shifts right, same price more production (Q) If it decreases the curve shifts left, same price less production |
| How does the expectations (6) affect the supply curve? | If a producer thinks price is going to go up, they will reduce the production today in order to make more benefit increasing the production when thr goods price increase. Viceversa |
| How does the other factors (7) affect the supply curve? | For example weather for agriculture, if the weather isn't favorable the production wil decrease, thus the curve shifts left |
| Equilibrium point | Where the demand and supply curves intersect. It is symbolized by P* and Q* |
| If the supply/demand curve shifts does the equilibrium price change? | Yes, depending on the change the change can affect P*, Q* or both |
| What is the Price Elasticity of Demand? | It is the change in Q followed by a 1% change in P |
| What is an elastic demand of a good? | A change in Q greater than 1% when price changes 1%. Elasticity>1 |
| What is an inelastic demand of a good? | A change in Q smaller than 1% when price changes 1%. Elasticity<1. |
| What influences the Price Elasticity of Demand? | 1. Goods with easy substitutes have more elastic demand 2. Necesities lower elasticity whereas luxuries higher elasticity 3. Narrowly defined markets- high easticity/broadly defined markets- lower elasticity 4. Goods higher elasticity over longer time |
| Formula of Price Elasticity of Demand | Price Elasticity of Demand = (% change in demand) / (% change in price) E=1/slope*P/Q |
| What is unit elasticity? | Elasticity=1 |
| When is total revenue (TR) is maximum? | When Price Elasticity of Demand=1, or when unit elasticity (same thing) |
| Graphically, how is an elastic curve? | Tending to horizontal. Low changes in P mean great changes in Q |
| Graphically, how is an inelastic curve? | Tending to vertical. Big changes in P means low changes in Q |
| When a good is easily substituted, Price Elasticity of Demand is elastic or inelastic? | Elastic |
| When a good is hardly substituted, Price Elasticity of Demand is elastic or inelastic? | Inelastic |
| What is Income Easticity of Demand? | It is the % change in demand (Q) when income(m) changes 1% |
| Graphically, how is a perfectly elastic curve? | Horizontal curve |
| Graphically, how is a perfectly inelastic curve? | Vertical curve |
| How does TR change as we move along the demand curve? | Case 1: Inelastic demand: P^-> TR^ Case 2: Elastic demand: P^-> TRv Case 3: Unit elastic: P^->TR reamins constant |
| What is an Engel curve? | It is a curve with income over quantity, it is positive |
| What is a normal good? | Using Income Elasticity of demand, when E(m)>0 <=> m^=> Qd ^ |
| What is an inferior good? | Using Income Elasticity of demand, when E(m)<0 <=> m^ => Qd v |
| What is a necessity? | 1<E(m)<0 |
| What is a luxury? | E(m)>1 |
| What is Cross Price Elasticity of demand? | Measures how Q of a good changes when ther price of another good changes |
| What is a substitute? | E(pr)>0 <=> Pr^ => Qr v => Q ^ |
| What is a complement? | E(pr)<0 <=> Pr^=> Qr v => Q v |
| What is he formula for the Income Elasticity of Demand? | E(m)= 1/slope * m/Q |
| What is the formula for the Cross Price Elasticity of Demand? | E(pr)= - 1/slope * Pr/Q |
| What is the Price Elasticity of Supply? | The change in Q when P changes 1%. E(supply)= (%change in supply Q)/(%change in price) E(supply)= 1/slope * P/Q |
| How can we measure the effects of public policies? | Evaluating changes in consumer and producer surplus |
| What is consumer surplus? | The difference between the amount buyer is willing to pay for a good and the amount he finally pays |
| What is producer surplus? | The difference between the amount he sells a product minus the production cost |
| What is a price ceiling? | A stop the goverment puts to the price, its the maximum price you can buy/sell it |
| What is a price floor? | A stop the goverment puts to the price, its the minimum price you can buy/sell a product |
| What are taxes? | Goverment policy instrument used to raise revenue for public projects and to redistribute income |
| How does a tax on the sellers affect the equilibirum price? | The equilibrium price rises, but sellers now get less money so their surplus is demeanished. The supply curve shifts left. |
| How does a tax on the buyers affect the equilibirum price? | The demand curve shifts left. Sellers recieve less money and sell less. |
| Is there differences between seller tax and buyer tax? | Both cases place a wedge between the price tha buyer buy and seller sell, the only difference is who pays the goverment |
| Who tanks bigger tax burden? | Seller or buyer, depends on which side is less elastic |
| What is the budget constraint and its formula? | The budget constraint or budget line is the curve that represents income, price of two goods (x,y) and the quantity I can buy of each of them inside my budget. Formula is: m=Px*Qx+Py*Qy which expressed in a line ecuation is Qy=(m/Py)-(Px/Py) *x |
| About budget line, what are the gaphical caracteristics? | The slope is the relative price between x and y (-Px/Py). The cut with axis are (m/Py) in y axis and (m/Px) in axis x, this represents the maximum amount of good x or y, respectively that I can buy. |
| What happens to budget line if there is a change of price? | If Py increases, (m/Py) v and (-Px/Py) the same. If Py decreases, (m/Py) and (-Px/Py) ^ If Px increases, (m/Px) and (-Px/Py) v If Px decreases, (m/Px) and (-Px/Py) ^ |
| What are the properties of preferences? | 1. Completeness 2.Transitivity 3. Monotonicity 4.Convexity |
| Properties of preferences, what is Completeness? | A preference relation is complete if it allows to order all possible combinations of good and services |
| Properties of preferences, what is Transitivity? | We consider a preference relation transitive if bundles A >~B and B >~C then we can assume that A>~C |
| Properties of preferences, what is Monotonicity? | A preference relation is monoton if "the more, the better" applies. i.e. Bundle A (3,6) > Bundle B (3,5) |
| Properties of preferences, what is Convexity? | Balanced bundles are preferred to extremes. i.e A (4,2) > B (0,6) |
| How do we represent the preference relation? | With indiference curves (IC) and utility function u(.) |
| What is the Indiference Curve (IC)? | In the x/y plane, represents a set of bundles that give the indicidual the same level of satisfaction. So if Bundles A and B are in the same IC then A~B |
| What is the Utility Function u(.)? | In plane x/y, represents the preference relation ">~" u(A) >=u(B) => A>~B |
| What is the Marginal Rate of Substitution (MRS)? | In a IC it is the slope of the curve, which is convex so MRS changes along the curve. It is the quantity of good Y I'm willing to sacrifice for 1 of good X |
| MRS is higher or lower if x^? | Lower, graphically the further away in X axis the less of good Y I have and the less of a good I have the less I'm willing to give up. |
Created by:
Nickrs8
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