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Chapter 1

ECON 1010 Chapter 1: Topics 2

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University of Manitoba
ECON 1010
Laura K.Brown

o78P ECON1010 2.PERFECTLY COMPETITVE MARKETS Market: set of all the consumers and suppliers who are willing to buy and sell a given good. Market equilibrium: occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price Perfectly competitive market is a market in which no individual supplier has any influence on the market price of the product Price taker is a firm that has no influence over the price at which it sells its product Externality is an external cost or benefit of an activity incurred by someone who is not involved in the productionconsumption of a given good. Characteristics of perfectly competitive markets Consumers and Suppliers Are Pricetake s: A equilibrium, both suppliers and consumers are not willingable to affect the market price. Homogenous Goods: All suppliers sell exactly the same product. E.g. the wheat market No externality: All production costs and benefits are incurred by he supplier of the good; similarly, all consumption costs and benefits are incurred by the consumer of the good. Goods are Excludable and Rival: Suppliers can prevent consumers from consuming a certain good (excludability) and so that good becomes unavailable to other consumers. Full Information: Suppliers and the consumers are perfectly infor ed regarding the characteristics of the good, including the quality and the price of a good. Full Entry and Exit: Suppliers are free to enter and exit the market SUPPLY IN A PERFECTLY COMPETITIVE MARKET SUPPLY CURVE FOR AN INDIVIDUAL Supply Curve: Representation of the relationship between the amount of a particular goods and services that sellers want to supply in a given time period and the price Marginal Benefit: increase in benefits associated with a small increase in level of activity Marginal Cost: increase in costs associated with a small increase in the level of activity (includes Opportunity cost and not just relevant cost) Costbenefit Principle: an individual (firmsociety) should undertake a particular action if the extra benefits of undertaking that action are at least as great as the extra costs Economic Surplus: gain from undertaking an action when the benefits outweigh costs
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