Chapter 9: Analysis of Competitive Markets

Question 1

Explain consumer surplus

Answer 1

Consumer surplus is the value that consumers receive by buying at the market price.

Question 2

Explain market failures

Answer 2

Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers.

Question 3

There are two important instances in which market failure can occur

Answer 3

1. Externalities - Action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price, examples
2. Lack of Information - Market failure occurs when consumers lack information of products and make incorrect decisions.

Question 4

Explain price supports

Answer 4

Price set by government above free-market level and maintained by governmental purchases of excess supply.