What´s the key factors of a competitive market?
There are many buyers and sellers in the market
No individual buyer and seller is big enough or has the power to be able to influence price
There is freedom of entry and exit to and from the market
Goods produced are homogenous (identical)
Buyers and sellers act independently and only consider their own position in making decisions
There are clearly defined property rights
What is demand
demand is the quantity of a good sellers are willing and able to purchase at different prices.
it can be portrayed in demand schedules and in a demand curve.
Demand increases with decreasing prices.
Demand decrases with increasing prices.
What´s the Marschall´s Law of Demand?
The greater amount to be sold, the smaller must be the price in order that it may find purchaser.
—> the amount demanded increases with a fall in price and vice versa.
How´s the demand curve looking?
strictly downward sloping
As the price approaches infinity quantity approaches zero
As the price approaches zero, quantity approaches infinity or the market saturation level
Name the differences of Moving along the demand curve and shifting the curve
Moving along the curve:
Price changes for reasons unrelated to demand
1)Income Effect
2)Substitution Effect
Shifting the curve:
Quantity changes for reasons other than price (larger or smaller quantity is demanded at any price)
Changes in prices of other goods
Changes in the income levels
Tastes, fashions, trends
Changes in the size and structure of the population
Advertising effects
Changes in expectations about the future
What is supply?
—> is the quantity of the good that producers / sellers are willing and able to produce / sell at different prices
Law of supply: The quantity of supplied goods increases when the prices increase
How does the supply curve look?
strictly upward sloping
As price approaches infinity, quantity approaches infinity or the maximum output of the economy
As price approaches zero, quantity approaches zero (typically already sooner)
What is the market equilibrium?
-> Market equilibrium is a longterm state of the market. Short term deviations are possible, but it always turns back to the equilibrium point.
How does a surplus or a shortage form
Shortage: Demand higher than supply
Surplus: Supply higher than demand
How do changes in supply and demand affect the equilibrium?
draw these
Elasticity of Demand and its degees
perfectly inelastic demand
inelastic demand
perfectly elastic demand
elastic demand
How can elasticity be calculated?
Perfectly inelastic demand: e=0
Perfectly elastic demand: e=∞
Inelastic demand: e<1
Elastic demand: e>1
Midpoint method
—> is used when a price P0 is being changed to P1 and changed back again to P0.
Because a change in the price from P0 to P1 and a change from P1 to P0 could result in widely diverging elasticity values, frequently the midpoint
method of calculating elasticities is used:
Point elasticity
Elasticity can be determined for a specific point using the derivative of the function:
See script
Name three factors that affect demand Elasticity
Availability of Substitutes
Necessity versus Luxury
Definition of the Market
Proportion of Income Devoted to the Product
Time Horizon
What´s the difference between a normal good and an inferior good?
Normal good: the quantity demanded decreases with falling income (c.p.)
Inferior good: the quantity demanded increases with falling income (c.p.)
Substitutes and complements differences
Substitutes : Have positive cross price elasticities
Complements : have negative cross price elasticitites
Examples
Substitutes —> Margarine statt Butter
Complements —> contributes value to another linked good when demand increases —> CD´s and CD-Player, Cereal and Milk
Which factors do affect Supply elasticity?
Productive Capacity
• Size of the Firm or Industry
• Mobility of Production Factors
• Ease of Transporting
• Ease of Storing
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