53 terms

Lec 2: supply and demand framework (ch 4, 5)

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Terms in this set (...)

Price taker
A person or firm with no power to be able to influence the market price
Perfectly competitive market (preliminary(初步的) definition)
A market in which all products and consumers of the product are price takers
Free market
One in which there is an absence of government intervention. Individual producers and consumers are free to make their own economic decisions
The price mechanism
The system in a market economy whereby changes in price in response to changes in demand and supply have the effect of making demand equal to supply
Equilibrium price
The price where the quantity demanded equals the quantity supplied: the price where there is no shortage or surplus. The price is the one that clears the market. This is shown in the demand and supply diagram by the point where the two curves intersect.
Equilibrium
A position of balance. A position from which there is no inherent tendency to move away
The law of demand
The quantity of a good demanded per period of time will fall as the price rises and rise as the price falls, other things being equal (ceteris paribus)
Income effect
The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change
Substitution effect
The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products
Quantity demanded
The amount of a good that a consumer is willing and able to buy at a given price over a given period of time
Demand schedule for an individual
A table showing the different quantities of a good that a person is willing and able to buy at various prices over a given period of time
Demand curve
A graph showing the relationship between the price of a good and the quantity of the good demanded over a given time period. Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis. A demand curve can be for an individual consumer or a group of consumers, or more usually for the whole market
Substitute goods
A pair of goods which are considered by consumers to be alternatives to each others. As the price of one goes up, the demand for the other rises
Complementary goods
A pair of goods consumed together. As the price of one goes up, the demand for both goods will fall
Normal goods
Good whose demand rises as people's income rise
Inferior(下級的) goods
Goods whose demand fall as people's income rise
Change in demand
The term used for a shift in the demand curve. It occurs when a determinant of demand other than price changes
Change in the quantity demanded
The term used for a movement along the demanded curve to a new point. It occurs when there is a change in price
Supply schedule
A table showing the different quantities of a good that producers are willing and able to supply at various prices over a given time period. A supply schedule can be for an individual producer or group of producers, or for all producers (the market supply schedule)
Supply curve
A graph showing the relationship between the price of a good and the quantity of the good supplied over a given period of time
Substitutes in supply
These are two goods where an increased production of one means diverting(轉移) resources away from producing the other
Goods in joint supply
These are two goods where the production of more of one leads to the production of more of the other
Change in the quantity supplied
The term sued for a movement along the supply curve to a new point. It occurs when there is a change in price
Change in supply
The term used for a shift in the supply curve. It occurs when a determinant other than price changes
Market clearing
A market clears when supply matches demand, leaving no shortage or surplus
Market environment
A firm is greatly affected by its market environment. The more competitive the market, the less discretion(隨意) the firm has in determining its price. In the extreme case of a perfect market, the price is entirely outside of the firm's control. The price os determined by demand and supply in the market, and the firm has to accept this price: the firm is a price taker
Perfect market
In a perfect market, price changes act as the mechanism whereby demand and supply are balanced. If there is a shortage, price will rise until the shortage is eliminated. If there is a surplus, price will fall until that is eliminated
Determinants of demand
Tastes, number and price of substitute goods, number and price of complementary goods, income, distribution of income and expectations of future price changes
Higher price, supply more
There are two reasons in the short run why a higher price encourages producers to supply more: 1. they are now willing to incur higher cost per unit associated with producing more; 2. they will switch to producing this product and away from now less profitable ones. In the long run, there is a 3 reason: new producers will be attracted into the market
Determinants of supply
Costs of production, profitability of alternative products, profitability of goods in joint supply, random shocks and expectations of future price changes
Price elasticity(彈性) of demand
A measure of the responsiveness of quantity demanded to a change in price
Elastic
If demand is (price) elastic, then any change in price will cause the quantity demanded to change proportionately more (ignoring the negative sign). It will have a value greater than 1
Inelastic
If demand is (price) inelastic, then any change will cause the quantity demanded to change by a proportionately smaller amount (ignoring the negative sign). It will have a value less than 1
Unit elasticity
When the price elasticity of demand is unity(結合), this is where quantity demanded changes by the same proportion as the price. Price elasticity is equal to -1.
Total (sales) revenue (TR)
The amount of a firm earns from its sales of a product at a particular price.
TR = P * Q
Here is referring to gross revenue, that is, revenue before the deduction of taxes or any other costs
Income elasticity of demand
The responsiveness of demand to a change in consumer incomes: the proportionate change in demand divide by the proportionate change in income
Cross-price elasticity of demand
The responsiveness of demand for one good to a change in the price of another: the proportionate change in demand for one good divided by the proportionate change in price of the other
Price elasticity of supply
The responsiveness of quantity supplied to a change in price: the proportionate change in quantity supplied divided by the proportionate change in price
Speculation(推斷)
This is where people make buying or selling decisions based on their anticipations of future prices
Self-fulfilling speculation
The actions of speculators tend to cause the very effect that they had anticipated
Stabilising speculation
This is where the actions of speculators tend to reduce price fluctuations

Speculation tends to stabilise price fluctuations if people believe that the price changes are only temporary
Destabilising speculation
This is where the actions of speculators tend to make price movements larger

Speculations tends to destabilise these fluctuations (make them more severe) if people believe that prices are likely to continue to move in the same direction as at present at least for some time
Risk
This is when an outcome may or may not occur, but where its probability of occurring is known

One way of reducing risk is to hold stocks. If the price of a firm's product falls unexpectedly, it can build up stocks rather than releasing its product on to the market. If the price later rises, it can then releases stock on to the market. Similarly with inputs: if their price falls unexpectedly, firms can build up their stocks, only to draw on them later if input prices rise
Uncertainty
This is when an outcome may nor may not occur and where its probability of occurring is not known
Future/forward market
A market in which contracts are made to buy or sell at some future date at a price agreed today
Future price
A price agreed today at which an item will be exchanged at some set date in the future
Spot price
The current market price
Price elasticity of demand
It measures the responsiveness of demand to a change in price. It is defined as the proportionate (or percentage) change in quantity demanded divided by the proportionate (or percentage) change in price

Given that demand curves are downward sloping, price elasticity of demand will have a negative value
More elastic demand
Demand will be more elastic the greater the number and closeness of substitute goods, the higher the proportion of income spent on the good and the longer the time period that elapses(消逝) after the change in price
Importance of price elasticity
It is important for firms to know the price elasticity of demand for their product whenever they are considering a price change. The reason is that the effect of the price change on the firm's sales revenue will depend on the product's price elasticity
Demand, price elasticity, revenue
When the demand for a firm's product is price elastic, a rise in price will lead to a reduction in consumer expenditure on the good and hence to a reduction in the total revenue of the firm

When the demand is price inelastic, a rise in price will lead to an increase in total revenue for the firm
short-run and long-run supply and demand
Short-run supply and demand tend to be less price elastic than long-run supply and demand. As a result any shifts in demand or supply curve tend to have a relatively bigger effect on price in the short run and a relatively bigger effect on quantity in the long run
Risk and uncertainty
A way of eliminating risk and uncertainty is to deal in future markets

When firms are planning to buy or sell at some point in the future, there is the danger that price could rise or fall unexpectedly in the meantime. By agreeing to buy or sell at some particular point in the future at the price agreed today (a future price), this danger can be eliminated. The bank or other institution offering the price (the speculator) is taking on the risk, and will charge for this service