Chapter 2.5 Flashcards
Price mechanisms
Prices determined by the forces of supply and demand in competitive markets
What is key to the market’s ability to allocate resources?
The signaling and incentive functions of prices
What do signals do?
Uses price to communicate information to decision-makers
What do incentives do?
Use prices to motivate decision-makers to respond to information
Allocative efficiency
Producing the quantity of goods mostly wanted by society
Marginal benefit
The extra benefit derived from each additional unit of something bought
Why can the demand curve also be called the marginal benefit curve?
Since marginal benefit decreases as the quantity of a good consumed increases, customers will be willing to buy an extra unit of the good only if its price falls
Why can the supply curve also be called a marginal cost curve?
Since marginal cost increases as the quantity of a good produced increases, producers will be willing to produce and sell an extra unit of the good only if its price increases
Consumer surplus
The highest price consumers are willing to pay for a good minutes the price actually paid
What is consumer surplus on a graph?
The area under the demand curve and above the price paid by the consumer up to the quantity purchased
Producer surplus
The price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good
What is producer surplus on a graph?
The area above the firms’ supply curve and below the price received by the firm up to the quantity produced
Social surplus/community surplus
The sum of consumer and producer surplus
When is social surplus at maximum?
At the point of competitive market equilibrium
Welfare
The amount of consumer and producer surplus
