ECON 040 Lecture Notes - Lecture 16: Economic Surplus, Externality, Opportunity Cost
22 Oct 2020
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Document Summary
What is a perfectly competitive market: consumers and suppliers are price-takers: when the market reaches a situation where the price is stable, any supplier will lose all their consumers if they were to ask for a higher price. The consumers will just decide to acquire the good from another supplier selling at a lower price. Similarly, if the consumers requested a cheaper price for a good, the suppliers will decide to serve to someone else instead. The supplier has no incentive to cut the price and the consumer has no incentive to negotiate an increase in price either. Hence in equilibrium, both consumers and producers are stuck" at the prevailing market price: homogenous goods: all suppliers sell the same product. In a market with no externalities, all the production costs and benefits are incurred by the supplier of the good; similarly, all the consumption costs and benefits are incurred by the consumer of the good.
