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shifts, respectively.Lesson 4Take AwaysAfter working through the material on this page and reading the associated textbook content,you should be able to confidently:understand and describe the changes in market equilibrium caused by an outward movement of the demand curve;understand and describe the changes in market equilibrium caused by an inward movement of the demand curve;understand and describe the changes in market equilibrium caused by an upward movement of thesupply curve;understand and describe the changes in market equilibrium caused by an downward movement of thesupply curve;understand and describe the results of combinations of movements of the supply anddemand curves;understand the difference between the movement of a curve and the change in equilibrium - that is, the movementOFa curve versus the movement of an equilibrium ALONG a curve.No one wants to sell to the right of the equilibrium, because price received will be less than the marginal cost and since the supply curve is above the demand curve, the price demanded will be above the WTPConsumer surplus – WTP – priceProducer Surplus – Price – WTALesson 5 EBF 200 Lesson 5 notes1.
Perfect Competitiona.Nobody has market power
i.Nobody has the ability to change the market equilibrium price based on their own behavior.b.Perfect Informationi.Everybody knows what their own choices are, and also that they know everything about the product.c.Product Homogeneityi.In a specific market, all products are identicald.Free Entry and Exiti.People make production and consumption decisions based upon their own free will.2.Market Power and Monopolya.Monopolyi.Most extreme but not most common example of market powerii.A monopolist is free to set prices or production quantities, but not both because he faces a downward sloping demand curve.iii.There are three ways a monopoly can exist1.All of some resource is owned by some firm (diamonds)2.The government allows a monopoly to exist (not common, but some countries have government-designated monopolies.)3.A Natural Monopolyexists (local power company).b.Why is a Monopoly bad?i.There is less than the most possible total wealth – sum of producer and consumer surplusesii.Will generate less wealth for a society than a competitive market would.EBF 200 Notes Lesson 4i.Demand Curve – relationship between price and quantity people are willing to buy, derived from marginal utility of consumption.ii.Supply Curve – relationship between price and quantity that firms are willingto sell, derived from marginal cost of production.Perfect competitioni.Nobody has the ability to change the market equilibrium price based on their own behavior. This means that there must be many buyers and sellers. Everybody is a “price-taker”, which means they must accept the market price, and they are not “price-setters”ii.Perfect informationiii.Product homogeneity means that in a specific market, all products are identical. Even though no two things are identical, we assume that certain groups of products are close enough to being the same.iv.Free entry and exit. People only make production and consumption decisions based upon their own free will. They are not forced to buy orsell things they do not want. It also means that people are not negatively affected by other people’s market decisions.