week 5 Flashcards
(23 cards)
There are dozens of laptop manufacturers around the world. Does the idea of efficient production mean that there should only be one laptop manufacturer making laptops at the lowest marginal cost?
no because efficient production doesn’t mean that only one firm can make the product efficiently. Efficiency in production occurs when a given quantity of output is produced at the lowest possible cost.
Each firm independently decides how many units to produce, and each will produce up to the point where the price received equals their marginal cost of production
Why do markets sometimes fail to generate efficient outcomes?
Our supply and demand curves represent well-informed buyers and sellers interacting in a well-functioning market with perfect competition. In reality, markets are affected by different levels of competition, unequal access to information, consumers’ behaviours that are not always rational, and government regulations that disrupt the interaction of supply and demand. Any combination of these factors can lead to market failure
what is economic surplus?
The total benefits minus total costs flowing from a decision.
how would you calculate economic surplus?
consumer surplus + producer surplus
or
marginal benefit – marginal cost
what is economic efficiency?
using resources in the best possible way to maximize overall societal well-being.
if a market achieves efficient outcomes what happens to the surplus?
The efficient outcome yields the largest possible economic surplus
what is consumer surplus ?
describes the gain from buying something at a price below the highest price you were willing to pay ( marginal benefit )
how would you calculate consumer surplus ?
marginal benefit – price.
can be shown in a graph by the point below the demand curve and above the equilibrium price
what is producer surplus?
the gain when sell something at a higher price than the marginal cost you incur.
how would you calculate the producer surplus?
price – marginal cost
can be shown in a graph by the point above the supply curve and below equilibrium price
when does market failure occur?
Market failure occurs when the free market’s allocation of resources is inefficient, leading to a loss of social welfare. This happens when individuals acting in their own self-interest don’t lead to the best overall outcome for society, such as when a factory’s pollution harms the environment.
when efficiency is maximised this means
you are producing at the lowest possible cost
each item is produced at the lowest possible marginal cost
it maximises benefits
what is the rational rule for the markets
produce until marginal benefit equals marginal cost
what are the 5 sources of market failure?
5 sources of market failure – market power, externalities, information problems, irrationality, government regulations.
what happens when the market is not at maximum efficiency
deadweight loss occurs this is underproduction or overproduction
what is an absolute advantage?
refers to being able to produce more or better goods and services than somebody else
what is a comparative advantage?
Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost
how would you calculate the opportunity cost of a task
hours this task takes / hours required to produce alternative output
how would being able to work out opportunity cost allow for specialisation
According to comparative advantage. Countries or firms will do more of what relatively they are good at. This is why there is international trade created through comparative advantage
if a firm knows they have a comparative advantage at producing a certain good they should spend more time and resources on that good
what is a positive statement ?
Positive statements are statements that are objective and fact-based
what is a normative statement
statements that involve value judgments or express personal opinions
Use comparative advantage to explain why you don’t produce everything you consume. For example, why do you buy a T-shirt from Target instead of making it yourself? Or why do you buy groceries instead of growing your own food?
Comparative advantage is the ability to complete a task with a lower opportunity cost. Comparative advantage is the basis of specialization. Most T-shirts you buy are produced in other countries that have a comparative advantage in apparel production, such as India and Bangladesh. You specialize in your individual job (in which you have comparative advantage), and you use your earned income to buy a T-shirt and groceries. By everyone focusing on the task in which they have a comparative advantage, you all experience the gains from trade. You enjoy consuming many more goods and services this way than you would trying to do everything yourself.
