Market Efficiency Term 2 Flashcards
What is market efficiency?
Producing the goods and services that society wants for the lowest possible cost. Economists refer to efficiency as making best use of scarce resources.
What do competitive markets and markets free from government intervention do?
Competitive markets and markets free from government intervention produce goods and services close to the equilibrium to maximise consumer and producer surplus.
What are the characteristics of an efficient market?
In an efficient market, it is impossible to make someone better off without making someone else worse off.
What is the definition of consumer surplus?
The difference between what consumers are prepared to pay and what they actually pay in a market. It is below the demand curve and above the price.
What is the definition of producer surplus?
The difference between what producers are willing to receive (cost of production) and what they actually receive in the market.
What is the formula for Total Surplus
TS = PS + CS
Effect of government intervention?
May decrease efficiency because the policy introduced may distort the price system and lead to under/overproduction.
What is deadweight loss?
A term used when there is under/overproduction. It is a waste of scarce resources, and where total surplus is not maximised.
What is a Price Ceiling?
A price ceiling is a legislated maximum price sellers are allowed to charge in a market. Price ceilings benefit consumers. Price ceilings may be the result of consumers lobbying to the government for a change in price, so the government sets a price ceiling below the price equilibrium.
What is a Price Floor?
A legislated minimum price sellers are allowed to charge in a market. Price floors help producers. Producers may have lobbied the government to increase prices, so the price floor is set above the price equilibrium.
Government Intervention - Taxes:
The government levy taxes on goods and services to raise revenue for government spending programmes e.g. fuel excise.
Although the money is put back into the economy through government expenditure, tax revenue is still smaller than combined decrease in consumer and producer surplus. Hence Deadweight loss occurs as total surplus is reduced.
Government Intervention - Subsidies:
Subsidies are a grant paid to producers with the purpose of reducing the costs of increased output. It is the opposite of taxes. Subsidies increase consumer and producer surplus, however, the cost of the subsidy is greater, so DWL is created.
Why are subsidies bad?
Subsidies are bad as they lead to overproduction, which is inefficient use of the scarce resources.
What does demand reflect?
Demand reflects the intentions of consumers with their limited resources.
What does supply reflect?
Supply reflects the cost that producers are willing to incur in producing goods and services.
