Market Efficiency - Chapter 4 (J)

Question 1

efficiency is the economy…

Answer 1

getting the most out of its scarce resources

Question 2

efficiency means producing…

Answer 2

goods that society wants at the lowest possible cost

Question 3

microeconomics is

Answer 3

concerned with the efficient allocation of scarce resources

Question 4

the demand curve reflects your

Answer 4

willingness to pay (the maximum price that a person is willing to pay for a good)

Question 5

two types of efficiency

Answer 5

1. productive or technical efficiency
2. allocative efficiency

Question 6

productive or technial effeciency

Answer 6

is production being done at lowest unit cost so there is no waste

Question 7

allocative efficiency

Answer 7

are resources being used to make products that people want

Question 8

consumer surplus

Answer 8

the difference between an items total value or total value received to consumers, and the actual price they pay for it

Question 9

when does consumer surplus occur

Answer 9

when the marginal benefit is more than the marginal cost

Question 10

consumer surplus example. Budget of $10,000 for dream car, they find perfect one for $6000. what is consumer surplus

Answer 10

$4000. saves that much

Question 11

producer surplus

Answer 11

the price of a good minus the marginal cost of producing it. (how much good is for sale for - how much it cost to make)

Question 12

when does producer surplus occur

Answer 12

when producers sell a product for more than their marginal cost.

Question 13

producer surplus example. It cost $2 to make a pair of socks and producers are selling them for $6. what is producer surplus

Answer 13

$4. if consumers are willing to pay 6 when it cost 2 to make producer surplus is 4.

Question 14

total surplus formula

Answer 14

consumer surplus + producer surplus

Question 15

when does total surplus occur when the market is efficient

Answer 15

at equilibrium

Question 16

deadweight loss

Answer 16

a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium

Question 17

deadweight loss means there is either

Answer 17

an underproduction or overproduction, prices are set below or above equilibrium

Question 18

deadweight loss is the decrease in

Answer 18

total surplus that results in an inefficient allocation of resources

Question 19

price controls

Answer 19

government regulated prices that set prices either above or below the equilibrium price

Question 20

price ceiling

Answer 20

a legislated maximum price that sellers are not allowed to charge more than in the market

Question 21

price celing helps

Answer 21

consumers

Question 22

price ceiling creates deadweight loss because it causes

Answer 22

shortages

Question 23

price ceiling model

Answer 23

. . . . . . . . . . . . . .
| . . . . . . . . . . . . . .
| . . . . . . . . . . . . . .
|_______________PC
|__ __ __ __ __ __ __

Question 24

price floor

Answer 24

a legislated minimum price that sellers are not allowed to charge less than in the market

Question 25

price floor helps

Answer 25

producers

Question 26

price floor creates deadweight loss because it causes

Answer 26

surpluses

Question 27

price floor model

Answer 27

|. . . . . . . . . . . . . .
|______________PF
|. . . . . . . . . . . . . .
| . . . . . . . . . . . . .
|__ __ __ __ __ __

Question 28

what is a tax

Answer 28

money paid by people or businesses to the government with the purpose of raising revenue for government spending programs.

Question 29

effects of tax on a market

Answer 29

a tax causes the market price to increase and quantity to fall. the market is smaller so some products or services are not made even though market value is higher than cost. it is inefficient

Question 30

welfare after tax

Answer 30

consumer surplus: smaller
producer surplus: smaller
overall: smaller welfare

Question 31

tax: model example

Answer 31

If pre tax price is $50, after tax:
consumers pay $60
producers charge $40
so both consumers and producers are losing $10

if pre tax quantity is 100:
after tax it is 80
20 less consumers get products
producers are losing 20 lots of orders

{example is if unitary elastic}

Question 32

burden of the tax

Answer 32

split between buyers and sellers
if inelastic: buyers carry more burden
if unit elastic: even split
if elastic: sellers carry more burden

Question 33

what items are likely to be taxed

Answer 33

cigarettes, so less people buy them as bad for everyones health
alcohol, to stop addictions
gambling, to stop addictions

Question 34

what is a subsidy

Answer 34

a grant paid to a producer (by government) with the purpose of reducing costs and increasing output

Question 35

effects of subsidy on market

Answer 35

a subsidy causes the market price to decrease and quantity to rise. the market size is bigger so too many goods and services are being made, the cost of the subsidy is bigger than the benefits to producers and consumers so it is inefficient.

Question 36

welfare after subsidy

Answer 36

consumer surplus: bigger
producer surplus: bigger
overall: bigger welfare

Question 37

what items are likely to be subsidised

Answer 37

school, so more people can go
hospitals, so more people can get help
public food services, so more people can eat

Question 38

vertical equity

Answer 38

people with a greater ability to pay taxes should pay more (eg $100,000 salary get taxed more than $60,000)

Question 39

horizontal equity

Answer 39

people with a similar ability to pay taxes should pay the same or similar amounts (same jobs pay same taxes)