Micro Unit 8 Flashcards

Question

# 8.4 Firms in competitive equilibrium Describe how this supply curve was constructed and why we dont use this model?

Answer 1

Horizontally sum the supply of all bakeries. Start with output from the lowest marginal-cost bakeries. Add quantities from higher-cost bakeries as price rises. Results in an upward-sloping market supply curve. We approximate market supply with a smooth curve.

Answer 2

A marginal cost curve for all the production of one good in a given area.

Answer 3

Since the equilibrium is the point where the demand curve crosses the marginal cost curve, we know that—in equilibrium—both the willingness to pay of the 5,000th consumer, and the marginal cost of the 5,000th loaf, are equal to the market price.

Answer 4

Consumer surplus is shaded in red and producer surplus is shaded in blue. Together this makes the total surplus

Answer 5

All gains from trade are exhausted

Answer 6

If fewer loaves were produced, there would be unexploited gains from trade: some consumers without bread would be willing to pay more than the cost of producing another loaf. If too many loaves were produced the total surplus would decrease, because the surplus on the extra loaves would be negative: they would cost more to make than consumers would be willing to pay.

Answer 7

At equilibrium, all potential gains from trade are exploited Any change would hurt at least one consumer or firm Therefore, no Pareto improvement is possible

Answer 8

Only if no one outside the market is affected by trade i.e. no external effects (externalities)

Answer 9

External effects impose unaccounted costs or benefits on others Example: noise or pollution from bread production Ignoring them means the equilibrium is not Pareto efficient

Answer 10

* A cost or benefit imposed on others that is not taken into account by the decision-maker * Can be negative (pollution) or positive (vaccination)

Answer 11

Covers all relevant aspects of the exchange Is legally enforceable at low cost. Prevents undermining pareto efficiency as all important aspects of exchange can be specified or enforced. Prevents hidden info and risk.

Answer 12

The side of the market that is less elastic gains more surplus If demand is less elastic than supply → consumers gain more If supply is less elastic than demand → producers gain more

Answer 13

A measure of how responsive producers are to price changes Analogous to elasticity of demand for consumers

Answer 14

If demand is less elastic than supply → consumers gain more If supply is less elastic than demand → producers gain more

Answer 15

Nash equilibrium

Answer 16

Shifts inwards or outwards

Answer 17

There is excess demand.

Answer 18

P and Q should be adjusted to achieve the new equilibrium (C).

Answer 19

People who's WTP was at the original e.q. point for the hat.

Answer 20

Shift in the curve is due to external factors and movement along the curve is due to price.

Answer 21

* At the old price, sellers can sell more than before * Price rises as buyers compete * Sellers increase output by moving along the supply curve

Answer 22

* Marginal costs do not change * Production technology and input prices are unchanged * Higher output occurs because price rises, not because costs fall

Answer 23

Inelastic (steep) supply → large price increase, small quantity increase Elastic (flat) supply → small price increase, large quantity increase

Answer 24

Exogenous shocks occur when an external change that comes from outside the model. As the demand curve shifts (effect is seen) but not explained.

Answer 25

Sellers observe excess demand (empty shelves, disappointed customers) They realise some buyers are willing to pay more Remaining a price-taker is no longer profit-maximising

Answer 26

The seller sets a different price from the prevailing market price Acts strategically rather than accepting the old equilibrium price Tests whether higher prices are accepted by consumers

Answer 27

Economic rent = profits above normal profit Arises temporarily when price > marginal cost Occurs during disequilibrium, not at long-run equilibrium

Answer 28

* Excess supply at the old price * Buyers may try to negotiate lower prices * Buyers become price-makers * Prices fall until the market clears

Answer 29

The economic rent that arises when a market is not in equilibrium, for example when there is excess demand or excess supply in a market for some good or service. In contrast, rents that arise in equilibrium are called equilibrium rents.

Answer 30

The improvement in the technology of breadmaking leads to: * an increase in supply (the supply curve shifts) * a fall in the price of bread * a rise in the quantity sold. The quantity demanded rises along the demand curve in response to the price change.

Answer 31

The term does not refer to a specific length of time, but instead to what happens while some things (such as prices, wages, capital stock, technology, or institutions) are assumed to be held constant

Answer 32

The term does not refer to a specific length of time, but instead to what is held constant and what can vary within a model. The short run refers to what happens while some variables (such as prices, wages, or capital stock) are held constant (taken to be exogenous). The long run refers to what happens when these variables are allowed to vary and be determined by the model (they become endogenous). A long-run cost curve, for example, refers to costs when the firm can fully adjust all of the inputs including its capital goods.

Answer 33

Leave the market

Answer 34

Install more equipment, thereby raising normal capacity to 200 loaves per day. The average cost curve will shift upwards because you now need to finance a larger investment in equipment. But if the price remains at €2, you will then produce 200 loaves at a lower average cost of €1.71 per loaf: your profit will increase. And reducing the average cost will help you to remain profitable if the price falls.

Answer 35

Startup costs that are incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and initial costs of finding staff.

Answer 36

You are only firm: your increased production is unlikely to affect the market price. Other firms invest in more capacity, too: Can affect market price and new firms may enter the market in pursuit of the profits to be made in baguette production.

Answer 37

The market price has fallen, but you can still use your new capacity and make a surplus on each loaf. While market adjusts you benefit from hgiher profit margins but long run your economic profit decreases.

Answer 38

* Average cost would be above the new market price * Economic profit would be negative * Business would be uncompetitive

Answer 39

* If other firms or potential entrants can: * Produce at lower average cost * Supply increases * Market price falls further

Answer 40

Large increase in price Small increase in quantity Capacity is fixed, so output cannot expand much

Answer 41

* Firms are constrained by existing capacity * Capital, equipment, and premises cannot be adjusted quickly

Answer 42

Firms can: * Expand factories * Buy new equipment * Enter or exit the market Capacity is adjustable over time

Answer 43

An agreement between firms to restrict competition. Typically by setting high prices or limiting output Aim: increase joint profits Often illegal and kept secret

Answer 44

1. Individual firms have an incentive to undercut the cartel price 2. By charging a lower price, a firm can capture market share 3. If many firms cheat, the cartel collapses

Answer 45

High-price outcome can give higher profit Joint profits are maximized when both charge the high price

Answer 46

If the other firm charges high, charging high gives higher profit No firm can improve its payoff by changing strategy alone

Answer 47

If the other firm charges low, charging high yields zero sales Best response is also to charge low

Answer 48

A coordination game Two Nash equilibria: High-price equilibrium (preferred by firms) Low-price equilibrium (competitive outcome)

Answer 49

Refers to anything making it difficult for new firms to enter a market, such as intellectual property rights or economies of scale in production.

Answer 50

* Incentives to cheat on the cartel increase * By charging a low price: * Firm A sells 72 units * Profit = $72 * This is greater than $60 earned in the cartel * Cheating is profitable * Once one firm cheats, others must follow to survive * Leads to collapse of the cartel

Answer 51

Each firm has an incentive to defect by cutting prices Defection yields a higher individual payoff than sticking to the cartel Mutual defection destroys the cartel

Answer 52

* Total cartel profits are smaller when more firms share the market * The gain from cheating becomes relatively larger * Cooperation becomes harder to sustain

Answer 53

* Consumers benefit from lower prices * Consumer gains are not included in firms’ payoff matrix * Overall welfare may be higher

Answer 54

Competitive equilibrium is the market outcome where: * Supply equals demand (the market clears) * All buyers and sellers are price-takers, meaning no individual can gain by quoting a different price. * In equilibrium, all trade happens at one price (called the Law of One Price) for identical goods.

Answer 55

* There are many independent buyers and sellers. * The goods are identical (homogeneous). * Buyers and sellers have good information about prices. * Buyers and sellers can always seek the best available price.

Answer 56

Perfect competition refers to markets that satisfy the conditions and are in competitive equilibrium. Real-world markets often don’t fully satisfy these ideal conditions (e.g., some sellers have market power, goods are differentiated, information is imperfect). However the model is still useful to act as a benchmark

Answer 57

A 30% tax is imposed on suppliers. Their marginal costs are effectively 30% higher at each quantity. The supply curve shifts, but not in a parallel manner, because the dollar amount paid in tax increases with the quantity produced. New equilibrium is established at a hgiher price with lower quantity.

Answer 58

The price received by suppliers (after they have paid the tax) is P0. The double-headed arrow shows the tax paid to the government on each unit of salt sold.

Answer 59

The effect of a tax on the surplus of buyers, sellers, or both.

Answer 60

Consumer surplus falls: Consumers pay a higher price, P1, and buy less salt. Producer surplus falls: Producers supply less and receive a lower net price, P0 . Tax revenue: A tax equal to (P1 – P0) is paid to the government on each of the Q1 units of salt sold (the green-shaded area). Total surplus (including tax revenue) is lower: The tax causes a deadweight loss equal to the area of the white triangle, which is 1/2 × (Q* − Q1) × (P1 − P0). this is deadweight loss

Answer 61

If tax revenue is used to fund public goods or services Benefits to society may outweigh the loss in the taxed market Welfare must be judged beyond the single market

Answer 62

Tax burden (incidence) falls mainly on consumers Can be seen as unfair, especially for necessities

Answer 63

Raise revenue → tax goods with inelastic demand Change behaviour → tax goods with elastic demand

Answer 64

the maximum legal price a landlord can charge for a rent.

Answer 65

Demand curve shifts right

Answer 66

The supply of housing for rent is inelastic, at least in the short run. The new market-clearing rent, €830, is much higher.

Answer 67

Excess demand is created

Answer 68

There are 8,000 people willing to pay €1,100 or more, but tenancies are not necessarily allocated to the people with highest willingness to pay. By subletting, they could do this and therefore generate economic rent.

Answer 69

* No * A price control usually creates excess demand or excess supply * Trade occurs on the short side of the market (the smaller of quantity demanded or supplied)

Answer 70

* Does not allocate housing to those who value it most * Creates shortages * Reduces Pareto efficiency

Micro Unit 8 Flashcards

(94 cards)