5.3 An Introduction to Market Efficiency Flashcards

1
Q

What dose the price of each unit of a product on the market demand curve show?

A

For each unit of a product, the price on the market demand curve shows the value to some individual consumer from consuming that unit.

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2
Q

What dose the lowest acceptable price shown on a supply curve reflect?

A

The lowest acceptable price as shown on the supply curve reflects the additional cost firms incur to produce each given pizza.

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3
Q

What is the reason the market supply curve is upwards loping?

A

The reason the market supply curve is upward sloping is that it reflects the costs of many producers, and they are not all the same.

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4
Q

Why is the market demand curve downward sloping?

A

The reason the market demand curve is downward sloping is that it shows the individual demands of many consumers, who each differ according to their preferences and willingness to pay.

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5
Q

For each unit of a product, what dose the price on the market supply curve show?

A

For each unit of a product, the price on the market supply curve shows the lowest acceptable price to some individual firm for selling that unit. This lowest acceptable price reflects the firm’s additional cost from producing that unit.

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6
Q

What is another way we can think of the supply and demand curve?

A

We can think of demand as value and supply as Cost

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7
Q

What is economic surplus?

A

For the entire 100 pizzas, the difference between the value to consumers and the additional costs to firms is called economic surplus and is shown by the shaded area ① in the figure.

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8
Q

What dose the area below the demand curve and above the supply curve show us?

A

For any given quantity of a product, the area below the demand curve and above the supply curve shows the economic surplus associated with the production and consumption of that product

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9
Q

What does this economic surplus represent?

A

The economic surplus is the net value that society as a whole receives by producing and consuming these 100 pizzas. It arises because firms and consumers have used resources that have a lower value (as shown by the height of the supply curve) and transformed them into something valued more highly (as shown by the height of the demand curve)

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10
Q

What are the conditions in which a specific product is considered market efficient?

A

Economists say that a market for any specific product is efficient if the quantity of the product produced and consumed is such that the economic surplus in that market is maximized. Note that this refers to the total surplus but not its distribution between consumers and producers.

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11
Q

When is a economic surplus maximized in a competitive market?

A

A competitive market will maximize economic surplus and therefore be efficient when price is free to achieve its market-clearing equilibrium level.

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12
Q

What is deadweight loss?

A

The purple shaded area is called the deadweight loss caused by the binding price floor, and it represents the overall loss of economic surplus to society.

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13
Q

What does the size of the deadweight loss represent?

A

The size of the deadweight loss reflects the extent of market inefficiency.

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14
Q

What dose the imposition of a binding price ceiling or price floor in an otherwise free and competitive market lead to?

A

The imposition of a binding price ceiling or price floor in an otherwise free and competitive market leads to market inefficiency.

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15
Q

Other then creating losses/gains what doe binding price floors and ceilings create?

A

Binding price floors and price ceilings do not merely ­create gains for some and losses for others as they redistribute economic surplus. They also lead to a reduction in the quantity of the product transacted and thus a reduction in total economic surplus.

Society as a whole receives less economic surplus as compared with the free-market case. In this sense, these policies make society as a whole worse off.

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16
Q

What are some industries that output quotas are typically used in?

A

Output quotas are commonly used in Canadian agriculture, especially in the markets for milk, butter, and cheese. Output quotas are sometimes used in other industries as well; for example, they are often used in large cities to regulate the number of taxi drivers.

17
Q

What happens when the government introduces an output quota?

A

When the government introduces an output quota, it restricts the total output of this product and then distributes quotas—“licenses to produce”—among the producers.

18
Q

What happens to the price when outputs are restricted?

A

With output restricted, the market price rises to the price that consumers are willing to pay for this quantity of the product.

19
Q

What dose the deadweight loss of the output quota show in a output quota?

A

The purple shaded area—the deadweight loss of the output quota—shows the overall loss of economic surplus as a result of the quota-induced output restriction.

20
Q

What happens when a quota is introduced to an inelastic product?

A

If demand for the product is inelastic, as is the case in the dairy markets where quotas are commonly used, total income to producers rises as a result of the reduction in output.

But since their output falls, firms’ production costs are also reduced. The introduction of a quota system therefore leads to a rise in revenues and a fall in production costs—a clear benefit for producers!

21
Q

Wit the obvious benifts to firms in play when it comes to quota’s, what is the catch?

A

Producers must incur a very high cost in order to purchase the quotas. (The high price for quotas reflects the profits they can generate.)

For example, an average dairy farm in Ontario or Quebec has about 90 cows and produces about 2300 litres of milk per day. The market value of the quota required to produce this amount of milk is approximately $2.2 million.

22
Q

Who benefits the most from quotas?

A

The ownership of a quota therefore represents a considerable asset for those producers who were lucky enough to receive it (for free) when it was initially issued by the government. But for new producers wanting to get into the industry, the need to purchase an expensive quota represents a considerable obstacle. These large costs of purchasing the quota offset the benefits from selling the product at the (quota-induced) high price.

23
Q

What are the usual results when governments enact policies to control prices in an otherwise free market?

A

First, there is a redistribution between buyers and sellers; one group is made better off while the other group is made worse off. Second, there is a reduction in the overall amount of economic surplus generated in the market; the result is that the outcome is inefficient and society as a whole is made worse off.

24
Q

The finding that government intervention in otherwise free markets leads to inefficiency should lead one to ask why the government would ever intervene in such ways. The answer…

A

The answer in many situations is that the government policy is motivated by the desire to help a specific group of people and that the overall costs are deemed to be a worthwhile price to pay to achieve the desired effect.

25
Q

What kind of judgments are used when advocating for policies that redistribute surplus and reduce the total amount of surplus available.

A

In advocating these kinds of policies, ones that redistribute economic surplus but also reduce the total amount of economic surplus available, policymakers are making normative judgments regarding which groups in society deserve to be helped at the expense of others.

26
Q

What is the job of an economist in regards to such government policies.

A

The job of the economist is to carefully analyze the effects of such policies, taking care to identify both the distributional effects and the implications for the overall amount of economic surplus generated in the market.

27
Q

What is a positive analysis?

A

A positive analysis, emphasizing the actual effects of the policy rather than what might be desirable.

28
Q

What is the effect of Policies that intervene in otherwise free and competitive markets?

A

Policies that intervene in otherwise free and competitive markets—such as price floors, price ceilings, and output quotas—generally lead to a reduction in the total amount of economic surplus generated in the market.

29
Q

When is a markets surplus considered maximizied?

A

A market’s surplus is maximized when the quantity exchanged is determined by the intersection of the demand and supply curves. This outcome is said to be efficient.