Ch 4: Market Efficiency Flashcards
What is market efficiency?
making the best use of scarce resources
allocating resources to their most efficient use
producing goods that society wants at the lowest possible cost
- an efficient outcome means that it is not possible to make someone better off without making someone else worse off
What does the demand curve=?
willingness to pay curve, as price decreases people are more willing to pay
What does the supply curve =?
cost of production or = willingness to accept
What is marginal cost?
the extra cost of producing each additional unit will decrease until you reach your production capacity (equilibrium where marginal cost=0) i.e. a bakers oven
What is marginal benefit?
the additional benefit gained from the consumption of each additional item (at equilibrium where benefit=0) i.e. the consumption of Tim Tams, lobsters
What is DWL, consumer surplus and producer surplus?
DWL- deadweight loss, an avoidable decrease in total surplus due to inefficiency
consumer surplus- difference between what the consumer is willing to pay at a particular quantity vs. what they actually pay, a “profit for the consumer”
producer surplus- difference between what the supplier is willing to accept vs how much it costs them to produce the good, profit they make
What is total surplus?
- consumer surplus + producer surplus
- total benefits - total costs
What happens when price is above equilibrium?
producers gain what was once consumer surplus
What are some government policies that reduce efficiency?
market restrictions- i.e. taxis, water, electricity price controls- min/max price on good i.e. water (price ceiling taxes- cost on producer and create DWL subsidies paid to certain industries- govt. pays money to producers to lower the price i.e. cars
What is a price ceiling, what is an example and how is the graph drawn?
a price ceiling is the maximum price set below market equilibrium i.e. water market in WA
What is a price floor, what is an example and how is the graph drawn?
a legislated minimum price that sellers are allowed to charge in a market, a price which you can’t go below, it is above market equilibirum
Why are taxes inefficient?
because quantity decreases and price increases, however they are necessary because it is used for govt. spending which will increase the economic welfare for various groups in society. An optimum tax would be one with the least DWL
What does the graph of a market with a tax imposed look like?
Why is a subsidy inefficient?
consumer and producer collective gains are less than cost of subsidy, a subsidy is therefore inefficient because it leads to a DWL
What does the graph of a market with a subsidy imposed look like?
