Economics chap 5-7 Flashcards
Consumers,producers and efficiency of markets,market structures
Welfare economics
The study of how the allocation of resources affects economic well-being
Subjective vs Objective well-being
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
Allocative efficiency
A resource allocation where the value of the output by sellers matches the value placed on that output by buyers
Consumer surplus vs Producer surplus
Consumer surplus-Measures economic welfare from the buyers side
Producer surplus-Measures economic welfare from the sellers side
Consumer Surplus vs Producer Surplus(calculation)
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
Efficiency
The property of a resource allocation of maximizing the total surplus received by all the members of society
Pareto efficiency
It is not possible to reallocate resources in such a way as to make one person better off without making anyone worse off
Three insights concerning market outcomes
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
Social welfare function
The collective utility of society which is reflected by consumer and producer surplus
Price ceiling
A legal maximum on the price at which a good can be sold(shortage, lower price, higher demand)
Price floor
A legal minimum on the price at which a good can be sold(surplus, price is higher, low demand)
What happens when the government imposes a price ceiling ?
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
Effects of price ceilings
A binding price ceiling creates
1.shortages because Qd>Qs
2.Non-price rationing(long queues)
How price floors affect market outcomes
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
Indirect vs direct taxes
A direct tax is levied on income and wealth
Indirect tax is levied on the sale of goods and services
A specific tax
An ad valorem tax
Tax incidence
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
Subsidy
A payment to buyers and sellers to supplement income or lower costs and in which thus encourages consumption/provides an advantage to the recipient
Binding
Changing the Q and P in the market
Equity
The fairness of the distribution of well-being among the members of society
The degree of competition
No. of firms
Freedom of entry to industry
Nature of the product
Nature of demand curve
The four market structures
The perfect competition
Monopoly
Monopolistic competition
Oligopoly
Perfect competition assumptions
Firm of price takers
Freedom of entry
Identical products
Perfect knowledge
Benefits of perfect competition
Price equals marginal cost
Prices kept low
Firms must be efficient to survive
Market share
Is the proportion of total sales in a market accounted for by a particular firm
Market power
Where a firm can raise the price of its product and not lose all its sales to rivals
Natural monopoly
When a single firm can supply a good/service to an entire market at a smaller cost than could two/more firms
What happens when a monopoly increases the amount it sells
Output effect-more output is sold, Quantity is higher,TR increases
Price effect-price falls, so price is lower,decreases TR
Profit maximization
Monopoly maximizes profit by producing the quantity at which MR equals MC
Contestable markets
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
The deadweight loss
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
Price discrimination
Selling the same good at different prices to different customers even though the costs for producing for the two customers are the same
Arbitrage
The process of buying a good in one market at a low price and then selling it in another market at a higher price
Two important effects of price discrimination
It can increase the monopolists profits
It can reduce deadweight loss
Government response to the problems of monopoly
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
How prevalent are the problems of monopolies
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
Why monopolies arise?
Sole sellers of its product, also if it does not have close substitutes
Barriers to entry
3 important lessons from price discrimination
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.
