Topic 7- The Efficiency of Competitive Markets

Question 1

Positive Analysis vs Normative Analysis

Answer 1

What is

Wat should be (Value Judgements)

Question 2

What is absolutely amazing about market equilibrium?

Answer 2

It maximizes Consumer and Producer surplus!!!!BOTH

Question 3

Consumer Surplus

Answer 3

The amount a buyer is willing to pay-The amount actually paid

Question 4

Logic behind Consumer Surplus?

Answer 4

Find the Willingness to pay of any consumer

If I buy a good for elss than my willingness to pay, I AM HAPPY! SURPLUS

If I buy a good exactly equal to my willingness to pay= neutral it doesn’t matter either way

If a good is more than Iam willing to pay= no surplus

Question 5

What is consumer surplus closely related to?

VISUAL?

Answer 5

The Demand Curve for that Good

IT LOOKS LIKE A STAIR CASE WHEN DISCRETE (KNOWN AMT OF BUYERS)

IT LOOKS LIKE A CONTINUOUS GRAPH (wHEN MARKET DEMAND)

Question 6

How to use the demand curve to calculate consumer surplus?

Answer 6

The AREA! above the price and below the demand curve= consumer surplus

Question 7

hOW TO KNOW IF CONSUMER SURPLUS INCREASED?

Answer 7

Look if the area under the curve increased (Demand increase)

Question 8

So is consumer surplus a great way to make policy?

Answer 8

No because ‘willlingness to pay’ is not the best determinant of societys welfare

Drug addics are willing o pay everyhting for drugs, but that is not where policy makers should seek to maximize consumer surplus

but usually okay

Question 9

Consumer surplus TRIANGLE define:
-top left corner
-bottom left corner

Answer 9

-What you are willing to pay
-What you actually end up paying

Question 10

What is producer surplus measured off of?

Answer 10

What is the cost to the supplier

Question 11

Formula for Producer Surplus:

Question 12

What is producer surplus measured off of?

Answer 12

What is the OOPORTUNITY cost to the supplier

Question 13

What is producer surplus measured off of?

Answer 13

What is the OOPORTUNITY cost to the supplier

Question 14

What is producer surplus measured off of?

Answer 14

What is the OOPORTUNITY cost to the supplier

Question 15

Formula for Producer Surplus

Answer 15

Amount seller is paid- cost of production

Question 16

What does Consumer Surplus and Producer Surplus measure?

Answer 16

The amount each party can save

Question 17

On the step curves (discrete curves) where is the surplus for demand curve and supply curve

Answer 17

Supply curve is above the steps

demand curve is below the steps

Question 18

What area on the supply curve shows producer surplus

Answer 18

Area below the price and aboce the supply curve

Question 19

Why does producer surplus increase gradually?

Answer 19

Because at higher prices new producers enter the market to sell goods

Question 20

Why does consumer surplus increase gradually?

Answer 20

Because at lower prices more people want to buy

Question 21

Total Surplus Formula

Answer 21

=(Consumer Surplus)+(Producer Surplus)

or

(Value to buyers-Amount Paid)+(Amount paid to Sellers-Cost of Production)

ands simplify further

(Value to Buyers)-(Cost of Production)

Question 22

Goal of markets, and how?

Answer 22

TO BE EFFICIENT:
-PRODUCTIVE EFFICINECY: produced by the seller w lowest opp cost
-ALLOCATIVE EFFICIENY: revieved by the buyer with most value of the good

Question 23

Even though every consumer gets a differnt amount of surplus form the purchased good (Depending on preferences),,,,,

Answer 23

The marginal benefit they recieve from the last piece of good pruchased= the market price of that good

THE MARGINAL BENEFIT OF THE LAST ONE IS EQUAL FOR EVERYONE

Question 24

Even though every PRODUCER gets a differnt amount of surplus from the good they produce (different costs of production),,,,,

Answer 24

THE MARGINAL COST OF TH ELAST GOOD IS SAME FOR ALL (MARKET PRICE)

Question 25

Why is equilibrium the perfectly competitive market?

Answer 25

Because the Market Price= Marginal Benefit to Cons #1= Marginal Menefit to Cons #2= Marginal Cost to Prod #!= Marginal Cost to Prod #2 NO WAY TO REALLLOCATE THE DEMAND AND SUPPLY, THIS IS MOST EFFICIENT

Question 26

What are two assumptions we make to analyze if the amrket is efficient?

Answer 26

1. market perfectly competitive (no market power) 2. that the outcome of the market only impact the buyer/seller in that interaction (no externalities)

Question 27

Why does market power keep markets non competitive

Answer 27

Bc single powerful seller holds prices and quantity away from market equilibrium

Question 28

Why does externalities impact how efficient a market is?

Answer 28

Bc then the welfare implication of the good is more than jus value to buyers and cost of production to sellers (others are at stake)

Question 29

Other titles for Supply and demand curves

Answer 29

WILLINGNESS TO PAY CURVE (DEMAND) COST OF PRODUCTION CURVE (SUPPLY)

Question 30

resource allocation methods

Answer 30

Market price I Command I Majority rule I Contest I First-come, first-served I Lottery I Personal characteristics I Force

Question 31

Command

Answer 31

Command system allocates resources by the order (command) of someone in authority. I A command system works well in organizations with clear lines of authority but badly in an entire economy.

Question 32

Market Price

Answer 32

When a market allocates a scarce resource, the people who get the resource are those who are willing to pay the market price. Most of the scarce resources that you supply get allocated by market price.

Question 33

Majority Rule

Answer 33

Majority rule allocates resources in the way the majority of voters choose. Societies use majority rule for some of their biggest decisions

Question 34

Contest

Answer 34

A contest allocates resources to a winner (or group of winners). I A contest works well when the efforts of people are hard to monitor and reward directly.

Question 35

First-Come, First-Served

Answer 35

First-come, first-served allocates resources to those who are first in line. I First-come, first-served works best when scarce resources can serve just one person at a time in a sequence

Question 36

Lottery

Answer 36

Lotteries allocate resources to those with the winning number. I Lotteries work well when there is no effective way to distinguish among potential users of a scarce resource

Question 37

Personal Characteristics

Answer 37

Personal characteristics allocate resources to those with the ”right” characteristics. However, this method sometimes gets used in unacceptable ways

Question 38

Force

Answer 38

Force provides an effective way of allocating resources - establishes the legal framework in which voluntary exchange can take place in markets. It also plays a role in allocating resources - wars.

Question 39

Welfare economic

Answer 39

The study of how the allocation of resources affects economic well-being

Question 40

Marginal social benefit

Answer 40

DEMAND CURVE

Question 41

Marginal social cost

Answer 41

SUPPLY CURVE

Question 42

Underproduction

Answer 42

When you are at market equilibrium, and quantity then shifts from eqilibrium quantity to a quantity to the LEFT of equilibrium quantity (less than equlilbrium wuantity being produced) INEFFICIENTLY LOW

Question 43

Overproduction

Answer 43

When you are producing at a quantity that is more than market equiilibrium quantity!!!! produceign more than the left triangle!! INEFFICIENTLY HIGH

Question 44

What type of loss is overproduction and underproduction

Answer 44

A SOCIAL LOSS

Question 45

When using supply and demand curves to find consumer surplus/producer surplus/deadweight loss and there is SHORTAGE OR SURPLUS!!!!!!!!!!

Answer 45

BE VERY CAREFUL!!! THE AREA WHERE THE SURPLUS/SHORTAGE IS OCCURING IS NOT A PLACE WHERE THERE IS ANY SURPLUS what you have to do is draw a line where the quantity produced is, AND WHERE QUANTITY DEMANDED IS, you need BOTH AREAS! FOR A SURPLUS BITCH (triangle dwl)

Question 46

what do price ceilings and price floors fo to consumer surplus/prod surplus

Answer 46

create DEADWEIGHT LOSS!!! WHEN CALCULATING REMMEBER TO ONLY DO IT FROM WHERE THEREIS QSUPPLIES ANDDDDD Q DEMANDED what you have to do is draw a line where the quantity produced is, AND WHERE QUANTITY DEMANDED IS, you need BOTH AREAS! FOR A SURPLUS BITCH

Question 47

Where is the DWL in the supply and demand chart, that is caused by price ceiling and price floors?

Answer 47

LEFT TRIANGLE!!!! LIKE LEFT CORNER!!!