Economics chap 5-7

Question 1

Welfare economics

Answer 1

The study of how the allocation of resources affects economic well-being

Question 2

Subjective vs Objective well-being

Answer 2

Subjective:refers to the way in which people evaluate their own happiness

Objective:Refers to measures of the quality of life and uses indications developed by researchers

Question 3

Allocative efficiency

Answer 3

A resource allocation where the value of the output by sellers matches the value placed on that output by buyers

Question 4

Consumer surplus vs Producer surplus

Answer 4

Consumer surplus-Measures economic welfare from the buyers side

Producer surplus-Measures economic welfare from the sellers side

Question 5

Consumer Surplus vs Producer Surplus(calculation)

Answer 5

Consumer-Buyers willingness to pay for a good minus the amount the buyer actually pays for it

Producer-The amount a seller is paid for a good minus the sellers cost

Question 6

Efficiency

Answer 6

The property of a resource allocation of maximizing the total surplus received by all the members of society

Question 7

Pareto efficiency

Answer 7

It is not possible to reallocate resources in such a way as to make one person better off without making anyone worse off

Question 8

Three insights concerning market outcomes

Answer 8

Free markets allocate the supply of goods to the buyers who value them most highly ,as measured by their willingness
Markets might be efficient but are they fair
A social planner might also care about equity
Free markets allocate the demand for goods to the sellers who ca produce them at the least cost

Question 9

Social welfare function

Answer 9

The collective utility of society which is reflected by consumer and producer surplus

Question 10

Price ceiling

Answer 10

A legal maximum on the price at which a good can be sold(shortage, lower price, higher demand)

Question 11

Price floor

Answer 11

A legal minimum on the price at which a good can be sold(surplus, price is higher, low demand)

Question 12

What happens when the government imposes a price ceiling ?

Answer 12

The price ceiling is not binding if set above the equilibrium price
The price ceiling is binding if set below the equilibrium price,leading to a shortage

Question 13

Effects of price ceilings

Answer 13

A binding price ceiling creates
1.shortages because Qd>Qs
2.Non-price rationing(long queues)

Question 14

How price floors affect market outcomes

Answer 14

The price floor is not binding if set below the equilibrium price
The price floor is binding if set above the equilibrium price,leading to a surplus

Question 15

Indirect vs direct taxes

Answer 15

A direct tax is levied on income and wealth

Indirect tax is levied on the sale of goods and services

Question 16

A specific tax
An ad valorem tax
Tax incidence

Answer 16

A set amount per unit of expenditure
Is expressed as a percentage
Is the manner in which the burden of a tax is shared among participants in a market

Question 17

Subsidy

Answer 17

A payment to buyers and sellers to supplement income or lower costs and in which thus encourages consumption/provides an advantage to the recipient

Question 18

Binding

Answer 18

Changing the Q and P in the market

Question 19

Equity

Answer 19

The fairness of the distribution of well-being among the members of society

Question 20

The degree of competition

Answer 20

No. of firms
Freedom of entry to industry
Nature of the product
Nature of demand curve

Question 21

The four market structures

Answer 21

The perfect competition
Monopoly
Monopolistic competition
Oligopoly

Question 22

Perfect competition assumptions

Answer 22

Firm of price takers
Freedom of entry
Identical products
Perfect knowledge

Question 23

Benefits of perfect competition

Answer 23

Price equals marginal cost
Prices kept low
Firms must be efficient to survive

Question 24

Market share

Answer 24

Is the proportion of total sales in a market accounted for by a particular firm

Question 25

Market power

Answer 25

Where a firm can raise the price of its product and not lose all its sales to rivals

Question 26

Natural monopoly

Answer 26

When a single firm can supply a good/service to an entire market at a smaller cost than could two/more firms

Question 27

What happens when a monopoly increases the amount it sells

Answer 27

Output effect-more output is sold, Quantity is higher,TR increases
Price effect-price falls, so price is lower,decreases TR

Question 28

Profit maximization

Answer 28

Monopoly maximizes profit by producing the quantity at which MR equals MC

Question 29

Contestable markets

Answer 29

Entrance into the market, can enter and leave with loss
1)Importance of potential comp
2)A perfectly contestable market
3)Contestable markets and natural monopolies
4)Importance of costless exit

Question 30

The deadweight loss

Answer 30

Monopoly sets its price above marginal cost, places a wedge between the consumer’s willingness to pay and the producer’s cost

Wedge causes the quantity sold to fall short of the social optimum

Question 31

Price discrimination

Answer 31

Selling the same good at different prices to different customers even though the costs for producing for the two customers are the same

Question 32

Arbitrage

Answer 32

The process of buying a good in one market at a low price and then selling it in another market at a higher price

Question 33

Two important effects of price discrimination

Answer 33

It can increase the monopolists profits
It can reduce deadweight loss

Question 34

Government response to the problems of monopoly

Answer 34

1)Making monopolized industries more competitive
2)Regulating the behavior of monopolies
3)Turning some private monopolies into public enterprises
4)Doing nothing at all

Question 35

How prevalent are the problems of monopolies

Answer 35

Monopolies are common
Few goods are truly unique
Firms with substantial monopoly power are rare
Most firms have control over their prices because of differentiated products

Question 36

Why monopolies arise?

Answer 36

Sole sellers of its product, also if it does not have close substitutes
Barriers to entry

Question 37

3 important lessons from price discrimination

Answer 37

1)Rational strategy for a profit-maximizing monopolist charging according to their willingness to pay
2)Requires the ability to divide customers by the ability of their willingness to pay
3)Price discrimination can raise economic welfare.Monopoly takes all the dead-weight loss,just producer surplus.