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22 Cards in this Set

  • Front
  • Back

Perfect competition

If there are a large number of firms producing identical products, facing identical production costs and in which there are no barriers to entry or exit.


(No control over price, no market power and small portion of overall market)

Monopoly

A market where one firm dominates the market for a good that has no substitutes and where significant barriers to entry exist.


(Control over output and price, no competitions and no substitutes)

Oligopoly

A market structure which is dominated by only a few firms, or where a product is supplied only by a few firms. The barriers to entry are high.


(Possible collusion and anti competitive activity)

Market

An organization or arrangement through which goods and services are exchanged

Price mechanism

The process by which prices rise or fall as a result of changes in demand or supply.

Monopolistic competition

A market structure with many firms and freedom of entry, but where each firm produces a differentiated product, and thus has some control over the price. Examples include restaurants, hairdressers, and bars.

Firm

Individual or organization that combines the factors of production to create and sell goods and services on the market.

Industry

All firms engaged in the same market activity.

Criteria by which an industry is categorized as a particular market structure:

Number of firms in the industry


Level of market power


Differentiation between goods


Ease of exit and entry

Demand

The quantity of a good or service which consumers are willing to purchase at a given price over a given period of time.

Law of demand

As a price of a good increases, quantity demanded decreases; inverse relationship.

Factors that underlie law of demand

Income effect


Substitution effect

Income effect

As the price of a good decreases, the QD increases, as consumers now have more real income to spend.

Substitution effect

As the price of a good decreases, consumers switch from other substitute goods because its price is comparatively lower.

Law of diminishing marginal utility

As we consume additional units of something, the utility we derive from each additional unit diminishes.

Movement

A change in price causes a change in QD

Shift

An increase or decrease in demand at every single price will result in a shift of the demand curve due to the non price determinants of demand.

Non price determinants of demand

Income: people tend to increase their spending when income improves.


Price of related goods: substitute (goods that can be easily used in place of each other) vs complimentary (goods that go together).


Tastes and preferences.


Future prices and expectations of income (example: if we expect our income to go up we will increase our demand).


Number of buyers (more consumers more demand).


Demographic change (immigration)


Government policy


Seasonal change

Normal VS inferior good

Normal good: demand increase as income increases and decreases when income does.


Inferior good: demand increases as income decreases and decreases when income increases. It is the cheaper alternative to higher quality goods. (Ex: bus tickets)

Supply

The quantity of a good or service which sellers are willing to supply at a given price over a given period of time.

Law of supply

As price increases QS increases; direct relationship.

Non price determinants of supply

Cost of production


Productivity


Gov intervention


Price of related goods


Supply shock