5.3 An Introduction to Market Efficiency Flashcards
What dose the price of each unit of a product on the market demand curve show?
For each unit of a product, the price on the market demand curve shows the value to some individual consumer from consuming that unit.
What dose the lowest acceptable price shown on a supply curve reflect?
The lowest acceptable price as shown on the supply curve reflects the additional cost firms incur to produce each given pizza.
What is the reason the market supply curve is upwards loping?
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.
Why is the market demand curve downward sloping?
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.
For each unit of a product, what dose the price on the market supply curve show?
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.
What is another way we can think of the supply and demand curve?
We can think of demand as value and supply as Cost
What is economic surplus?
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.
What dose the area below the demand curve and above the supply curve show us?
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
What does this economic surplus represent?
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)
What are the conditions in which a specific product is considered market efficient?
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.
When is a economic surplus maximized in a competitive market?
A competitive market will maximize economic surplus and therefore be efficient when price is free to achieve its market-clearing equilibrium level.
What is deadweight loss?
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.
What does the size of the deadweight loss represent?
The size of the deadweight loss reflects the extent of market inefficiency.
What dose the imposition of a binding price ceiling or price floor in an otherwise free and competitive market lead to?
The imposition of a binding price ceiling or price floor in an otherwise free and competitive market leads to market inefficiency.
Other then creating losses/gains what doe binding price floors and ceilings create?
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.