Chapter 14 Equilibrium and Efficiency

Question 1

What effect does an increase in the economies of scale have on a market in the long run?

Answer 1

Economies of scale refers to a firm’s efficiency at producing a good so an increase in the economies of scale will allow the firm to produce more efficiently. Therefore, the size of a typical firm will increase as well in order to be able to produce more and more efficiently.

Question 2

Given a demand and supply function for a market, how do you find aggregate, consumer, and producer surplus?

Answer 2

You must set the demand and supply function equal to eachother and find the competitive market equilibrium price and quantity. The area between the demand and supply function will be equivalent to the aggregate surplus. The area above the competitive market price is considered the consumer surplus and area below is producer surplus.

Question 3

Define aggregate, consumer, and producer surplus.

Answer 3

Consumer surplus: sum of the consumers’ willingness to pay less their total expenditure
Producer surplus: sum of firm’s revenues less their avoidable costs
Aggregate surplus: addition of both of these

Question 4

Define deadweight loss

Answer 4

Deadweight loss: reduction in aggregate surplus below its maximum value

Question 5

Given the demand function for a firm, fixed cost, and variable cost, AND a drop in fixed cost how do you find the short run market equilibrium? What about in the long run?

Answer 5

To find the short run market equilibrium we do not need to worry about the drop in fixed cost since that will not apply in the short run. In the short run, you must find MC, TC (with fixed cost), AC and equate MC and AC. This will give you the quantity equilibrium and plug that into AC to find P. Plug P into original demand function to find total Q and divide that by P to find number of firms. In the long run, execute the same procedure, except taking into account to the new fixed cost.