Economics Lecture 3: Demand & Supply
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Questions and Answers

What is the assumption underlying the upward slope of an individual firm's supply curve?

  • Decreasing marginal costs
  • Increasing marginal costs (correct)
  • Constant marginal costs
  • None of the above

How is the market supply curve constructed?

  • By averaging the individual firm's demand curves
  • By averaging the individual firm's supply curves
  • By summing the individual firm's supply curves (correct)
  • By summing the individual firm's demand curves

Which of the following is NOT a ceteris paribus condition that affects the position of an individual firm's supply curve?

  • Consumer preferences (correct)
  • Input prices
  • Technology
  • Number of firms in the market

How does a change in input prices affect the market supply curve?

<p>Increases in input prices shift the market supply curve to the left. (D)</p> Signup and view all the answers

If there is an increase in the number of firms in the market, what happens to the market supply curve?

<p>It shifts to the right. (A)</p> Signup and view all the answers

What is the effect of imposing a specific tax on a market?

<p>The price that buyers pay increases, and the price that sellers receive decreases. (A)</p> Signup and view all the answers

What is the welfare impact of imposing a specific tax?

<p>Both consumer surplus and producer surplus decrease. (A)</p> Signup and view all the answers

What is the reason for the deadweight loss (DWL) created by a specific tax?

<p>The tax discourages some mutually beneficial trades from occurring. (A)</p> Signup and view all the answers

Which of the following factors influences the burden of the tax?

<p>All of the above. (D)</p> Signup and view all the answers

If the demand for a product is perfectly elastic, who bears the burden of a specific tax?

<p>The sellers. (A)</p> Signup and view all the answers

If the supply for a product is perfectly inelastic, how much of the tax burden falls on the sellers?

<p>All of it. (A)</p> Signup and view all the answers

Why is it not necessary to shift curves when analyzing the impact of a specific tax?

<p>The tax wedge represents the difference between the price buyers pay and the price sellers receive, making curve shifts unnecessary. (D)</p> Signup and view all the answers

What is the main advantage of using the 'tax wedge' approach to analyze the effect of a specific tax?

<p>It eliminates the need to shift curves, simplifying the analysis. (D)</p> Signup and view all the answers

What happens to the supply curve when there is an increase in the number of firms?

<p>The supply curve shifts to the right (C)</p> Signup and view all the answers

What is indicated by the point of intersection between the supply curve and the demand curve?

<p>It represents the equilibrium price (A)</p> Signup and view all the answers

If the price is too high, what market condition occurs?

<p>Excess supply (C)</p> Signup and view all the answers

What economic term best describes a scenario where there is no pressure to change the current market situation?

<p>Equilibrium (B)</p> Signup and view all the answers

In a state of excess demand, what will market forces cause?

<p>The price will rise to equilibrium (B)</p> Signup and view all the answers

Which of the following statements best describes excess supply?

<p>Suppliers cannot sell their products (B)</p> Signup and view all the answers

If the equilibrium price is $50 and the current price is $80, what occurs?

<p>There will be excess supply (D)</p> Signup and view all the answers

What phenomenon causes the price to fall when there is excess supply?

<p>Market forces (A)</p> Signup and view all the answers

What leads to a situation of disequilibrium?

<p>Changes in consumer preferences (A)</p> Signup and view all the answers

What is the equilibrium quantity represented by in the supply and demand model?

<p>The quantity supplied equals quantity demanded (A)</p> Signup and view all the answers

What effect does a specific tax on buyers have on the market demand curve?

<p>It shifts vertically downwards by the amount of the tax. (B)</p> Signup and view all the answers

If a seller's cost to produce a widget is £5 and a tax of £2 is imposed, what minimum price does the seller now require to produce a widget?

<p>£7 (C)</p> Signup and view all the answers

When a tax is imposed on sellers, how does it affect the market supply curve?

<p>It shifts vertically upwards by the amount of the tax. (A)</p> Signup and view all the answers

What is a key insight gained regarding tax responsibilities whether for buyers or sellers?

<p>The outcome of the market equilibrium will be identical regardless of who pays the tax. (A)</p> Signup and view all the answers

How does the price paid by buyers change when a specific tax is imposed?

<p>It increases but at a rate less than the tax amount. (A)</p> Signup and view all the answers

What does it imply if the market demand curve shifts vertically downwards?

<p>The quantity demanded at each price level decreases. (C)</p> Signup and view all the answers

What is the likely outcome for the market equilibrium when a £2 tax is placed on sellers?

<p>A decrease in the quantity supplied at all prices. (A)</p> Signup and view all the answers

What can be inferred if the government implements a specific tax on buyers and sellers simultaneously?

<p>The market equilibrium will still reach a point of balance despite both taxes. (B)</p> Signup and view all the answers

Which of the following companies had the lowest profit margin in 2018?

<p>Fedex (C)</p> Signup and view all the answers

Which of the following statements is consistent with Porter's 5 Forces?

<p>Firms in industries with inherently low profitability can still outperform others. (B)</p> Signup and view all the answers

Which of the following statements is NOT consistent with Porter's 5 Forces?

<p>Firms in inherently profitable industries always have the same level of profit. (A)</p> Signup and view all the answers

Which of the following statements best reflects a key takeaway from the provided analysis?

<p>Despite the industry average, firms within the Consumer Staples industry exhibit significant variation in their profitability. (B)</p> Signup and view all the answers

What is consumer surplus?

<p>The price buyers are willing to pay minus the market price. (B)</p> Signup and view all the answers

What determines the producer surplus?

<p>The price received for a good minus the minimum price at which suppliers are willing to sell it. (C)</p> Signup and view all the answers

In a fully competitive market, what is maximized?

<p>Consumer surplus and producer surplus combined. (A)</p> Signup and view all the answers

What does excess supply indicate in a market?

<p>Too much is being produced, leading to wasted resources. (C)</p> Signup and view all the answers

What is true about the competitive equilibrium outcome?

<p>It is allocatively efficient. (A)</p> Signup and view all the answers

What does excess demand suggest about production levels?

<p>Too little of what people want is being produced. (A)</p> Signup and view all the answers

Which of the following best describes the relationship between market price and consumer surplus?

<p>Consumer surplus decreases as market prices rise. (C)</p> Signup and view all the answers

What happens to consumer and producer surplus in a market that is not fully competitive?

<p>They are reduced compared to a competitive market. (C)</p> Signup and view all the answers

Flashcards

Supply Curve

The relationship between the price of a good or service and the quantity that firms are willing and able to supply, assuming all other factors remain constant.

Market Supply Curve

A supply curve that represents the total quantity supplied by all firms in a market at different prices, holding other factors constant.

Ceteris Paribus Conditions

Factors other than price that can influence a firm's willingness to supply a good or service, including input prices, technology, and the number of firms in the market.

Movement along the Supply Curve

A change in the quantity supplied of a good or service in response to a change in its price, while holding other factors constant.

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Shift in the Supply Curve

A shift in the entire supply curve, caused by a change in one or more of the ceteris paribus conditions, such as input prices, technology, or the number of firms in the market.

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Equilibrium Point

The point where the supply and demand curves intersect. It represents the price and quantity at which the market is in balance, with no pressure to change.

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Market Equilibrium

A state of the market where there is no pressure for price to change. Supply and demand are balanced.

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Excess Supply

When the quantity supplied is greater than the quantity demanded. This leads to a downward pressure on price.

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Excess Demand

When the quantity demanded is greater than the quantity supplied. This leads to an upward pressure on price.

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Price Adjustment

The movement of price towards equilibrium due to market forces. If there is excess supply, the price falls. If there is excess demand, the price rises.

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Demand Curve

A graphical representation of the relationship between price and quantity demanded. It shows how much consumers are willing to buy at each price.

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Shift in Supply Curve

A change in the conditions that affect the supply of a good or service, causing the supply curve to shift. Examples: Changes in input costs, technology, or the number of firms in the market.

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Shift in Demand Curve

A change in the conditions that affect the demand for a good or service, causing the demand curve to shift. Examples: Changes in consumer income, tastes, or the price of related goods.

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Consumer surplus

The difference between what a consumer is willing to pay for a good and what they actually pay.

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Producer surplus

The difference between what a producer receives for a good and the minimum price they would be willing to sell it for.

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Allocative Efficiency

A situation where the sum of consumer surplus and producer surplus is maximized.

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Competitive Equilibrium

The point where the supply and demand curves intersect, representing the equilibrium price and quantity.

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Supply and Demand Model

The interaction of supply and demand determines the market price and quantity of a good.

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Welfare Triangles

A graphical representation of the total benefit to consumers and producers in a market.

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Tax on Buyers

A tax imposed on buyers of a good or service, shifting the demand curve downwards by the amount of the tax.

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Tax on Sellers

A tax imposed on sellers of a good or service, shifting the supply curve upwards by the amount of the tax.

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Price Paid by Buyers

The price buyers pay after a tax is imposed on a good or service.

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Price Received by Sellers

The price sellers receive after a tax is imposed on a good or service.

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Indirect Tax

A tax levied on goods and services at each stage of production and distribution.

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Tax Incidence

Regardless of who is legally responsible for paying the tax to the government (buyers or sellers), the ultimate impact on market equilibrium is the same.

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Specific Tax

A specific amount of tax imposed per unit of a good or service, regardless of price.

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Industry Profitability

The ability of companies to generate profits in a particular industry. Some industries are naturally more profitable than others due to factors like competition, demand, and barriers to entry.

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Porter's Five Forces

The five competitive forces identified by Michael Porter that influence the profitability of an industry: threat of new entrants, bargaining power of buyers, bargaining power of suppliers, threat of substitute products, and rivalry among existing competitors.

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Firm-Specific Profitability

The degree to which a company can earn a higher profit margin than its competitors in the same industry. Factors such as efficiency, innovation, and brand recognition can contribute to a higher profit margin.

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Market Environment Analysis

Analyzing the specific environment a company operates in to identify opportunities and threats to its profitability. This includes looking at factors such as market dynamics, competition, and customer behavior.

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Exploiting the Environment

Taking advantage of favorable market conditions and strategic decisions to achieve higher profits. This may involve finding niches, developing unique products, or building strong customer relationships.

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Tax wedge

The difference between the price buyers pay and the price sellers receive after a specific tax is imposed.

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Deadweight Loss (DWL)

A situation where the imposition of a tax leads to a reduction in the quantity of goods or services traded in a market.

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Tax Revenue

The total revenue collected by the government from a tax.

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Welfare Impact of Indirect Taxes

The loss of consumer surplus and producer surplus due to a tax, resulting in a decrease in overall welfare.

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Tax Burden

The burden of a tax is shared between buyers and sellers, depending on the elasticity of supply and demand.

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Consumer Surplus Loss

The amount of consumer surplus lost due to a tax. It's the difference between the total amount consumers would have been willing to pay and the amount they actually pay.

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Producer Surplus Loss

The amount of producer surplus lost due to a tax. It's the difference between the total amount producers would have received and the amount they actually receive.

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Study Notes

Lecture 3: Continuing Demand & Supply; Review of the Market Experiment; The impact of Taxes & Subsidies

  • The market supply curve is constructed from individual firms' supply curves.
  • An individual firm's supply curve slopes upwards because of short-run costs increasing as quantity supplied rises.
  • Firms' supply curves assume constant input prices, technology, number of firms, and other factors (ceteris paribus).
  • The market supply curve is the sum of all individual firm supply curves.
  • A change in one or more of the ceteris paribus conditions will cause a shift in the supply curve.
  • For example, an increase in the number of firms in the market shifts the supply curve to the right.
  • Equilibrium is a state of balance in a market where there is no pressure to change the situation.
  • Equilibrium is found at the intersection of the supply and demand curves.
  • Equilibrium occurs at a specific price and quantity.
  • In a market, if the price is too high, there will be excess supply. The price will fall to the equilibrium price.
  • If the price is too low, there will be excess demand. The price will rise to the equilibrium price.
  • Self-interested human agency responding to market incentives, not an invisible hand, drives market outcomes.
  • Consumer surplus is the difference between the price a buyer is willing to pay and the actual market price.
  • Producer surplus is the difference between the market price and the price a seller is willing to accept for the product.
  • Both consumer and producer surplus, taken together, measure the total benefits of a market.
  • Competitive equilibrium maximizes the sum of consumer and producer surpluses.
  • Excess supply indicates a surplus of production and is a waste of scarce resources.
  • Excess demand signals a shortfall in production of items people want.
  • Prices act as signals to allocate resources more effectively.
  • Prices will adjust to ration demand for scarce resources.
  • The simple model of supply and demand explains how competitive markets coordinate the use of resources.
  • A tax on buyers shifts the market demand curve vertically downwards.
  • A tax on sellers shifts the market supply curve vertically upwards.
  • The tax wedge is the difference between the price buyers pay and the price sellers receive after the tax.
  • Regardless of being placed on buyers or sellers, an identical outcome for market equilibrium occurs.
  • The incidence of a tax depends on the relative elasticities of demand and supply.
  • Subsidies are the reverse of taxes, creating a surplus of the product.
  • A subsidy increases the price received by sellers, leading to a rightward shift in the supply curve.
  • The benefit of a subsidy is a function of the relative elasticities of demand and supply in the market.
  • A key goal in the study of markets is to understand what influences the profit potential or profitability of industries.
  • Porter's 5 forces model can provide a framework for analyzing competitive forces that shape market outcomes.
  • Porter's model highlights the importance of market definition and potential pitfalls, such as incorrectly defining market boundaries or focusing too narrowly.
  • The model identifies the forces that affect a firm's performance potential in a given market: bargaining power of suppliers, rivalry among existing competitors, threat of new entrants, threat of substitute products or services, and bargaining power of buyers.
  • The model points to a focus on cost leadership or differentiation strategies.

5-Forces Model

  • Some industries are inherently more profitable than others.
  • Firms within seemingly similar activities may have wildly different profit rates.

Market Experiment

  • Data on the market, including predicted equilibrium price and quantity, and actual outcome data for different rounds are presented.
  • Specific examples of market simulations (ex. sausages, potential customers, and costs for example).

Taxes and Subsidies

  • VAT is a type of tax added to goods and services. Different rates apply for different products and services.
  • An ad valorem tax is a percentage-based tax on the value of a good or service.
  • A specific tax is a fixed amount per item.

Overview

  • The lecture includes an overview of factors determining competitive equilibrium.
  • A review of the market experiment illustrates the concept of market equilibrium.
  • Different types of indirect taxes and subsidies, their impacts on markets, and different characteristics of relevant markets are explored.

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Description

This quiz covers key concepts from Lecture 3 on demand and supply, focusing on the construction of market supply curves and the effects of taxes and subsidies. Understand how individual firm's supply curves contribute to the overall market supply and the conditions under which equilibrium is achieved. Test your knowledge on shifts in supply curves and market dynamics.

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