ECON101 Unit 4 Flashcards
Eight methods of allocating scarce resources:
1) Market price
2) Command
3) Majority rule
4) Contest
5) First come, first served
6) Lottery
7) Personal characteristics
8) Force
What is the difference between individual and market demand curves?
Individual demand curve is the relationship between quantity demanded and price for a single individual
vs.
Market demand curve is the horizontal sum of all individual demand curves (MSB CURVE).
What is the equation for consumer surplus and what and where is it?
- The difference between the consumers’ willingness to pay for a commodity and the actual price paid by them …
- (Marginal social benefit of unit - price paid for it)
- Area under demand curve but above price consumers pay for the good
- Buying a good for less than it is worth to us
How does a change in price affect consumer surplus?
A rise in price = decreases CS
A fall in price = increases CS
What is producer surplus?
- The difference between the amount the producer is willing to supply goods for and the actual amount received by producer
- area above supply curve, but below market price
- when it exceeds their marginal cost
What is the difference between individual and market supply curves?
Individual supply curve is the relationship between quantity supplied and price for a single producer
vs.
Market supply curve is the horizontal sum of all individual supply curves (MSC CURVE).
How does a change in price affect producer surplus?
Rise in price = increases PS
Fall in price = decreases PS
What are the traits of a competitive equilibrium?
- Market equilibrium achieved
- Quantity demanded = quantity supplied
- Allocative efficiency achieved
- Resources used where most valued
- MSB = MSC
- Total surplus maximized
- Goods/services at lowest possible cost in quantities producing greatest value
What is market failure?
Occurs when a good/service is under or over produced
Underproduction facts:
- Deadweight loss is on left side of equilibrium
- Produces less than equilibrium
- Total surplus shrinks/diminished
- MSB greater than MSC
- Not allocative efficiency
Overproduction facts:
- Deadweight loss on right side of equilibrium
- Produces more than equilibrium
- Resources wasted
- MSC greater than MSB
- Social loss
Reasons for market failure?
- Price and quantity regulations
- Taxes + subsidies
- Externalities
- Public good/common resources
- Monopoly
- High transaction costs
Market fairness: If the result isnt fair…
If the result isnt fair and the rules aren’t fair it is NOT fair
What is the concept of utilitarianism?
Greatest happiness is when the income is equally distributed
What is the big trade off?
Efficiency and fairness
= economic pie shrinks b/c taxing people makes them work less
