8 - Supply and Demand: Price-taking and competitive markets Flashcards
(15 cards)
What is the relationship between marginal cost and supply curve for a price-taking firm?
They are equal.
There are two different types of producers of a good in an industry where firms are price-takers. The marginal cost curves of the two types are given below:
Type A is more efficient than Type B: for example, as shown, at the output of 20 units, the Type A firms have a marginal cost of $2, as opposed to a marginal cost of $3 for the Type B firms. There are 10 Type A firms and 8 Type B firms in the market. Which of the following statements is correct?
- At price $2, the market supply is 450 units.
- The market will supply 510 units at price $3.
- At price $2, the market’s marginal cost of supplying one extra unit of the good will depend on the type of the firm that produces it.
- With different types of firms, we cannot determine the marginal cost curve for the market.
B
Is the price-taking market pareto efficient?
Yes.
Total surplus is maximised (assuming firms are profit-maximising)
Why is the price-taking market pareto efficient?
- surplus maximised
- contracts are complete
- no effects on others
Why might the price-taking market not be pareto efficient?
- there may be effects on others we cannot consider
- price-takers are hard to find in real life
Draw the effect of a tax on a good.
Label DWL and gov. revenue on the effect of a fixed tax on a good.
What does the overall effect of the tax depend on?
What the government does with the tax revenue.
If spending is not on activities that do not contribute to wellbeing, then they reduce overall economic welfare.
What is the best good for governments to tax?
Goods that are inelastic. There is little impact on overall quantity.
Why can taxation on inelastic goods backfire?
They are difficult for people to escape, so they can lead to revolts (Boston Tea Party).
Draw the effect of an ad valorem tax on a good.
What is the difference between ad valorem taxes and flat taxes?
Ad valorem: percentage of the price.
Flat: fixed amount per unit.
Which of the following statements are correct?
- In the post-tax equilibrium, the consumers pay P1 and the producers receive P*.
- The government’s tax revenue is given by (P* – P0)Q1.
- The deadweight loss is given by (1/2)(P1 – P0)(Q* – Q1).
- As a result of the tax, the consumer surplus is reduced by (1/2)(Q1 + Q)(P1 – P).
C - This is the area of the triangle between the supply and demand curves, below AB.
D -This is the area of the trapezium between the horizontal dotted lines through A and B.
If tax is placed on an elastic good, where does the incidence mostly fall on?
Consumers.
