Market Efficiency Flashcards
What is economic efficiency?
Economic efficiency is producing goods and services that society wants at the lowest possible cost.
How do competitive markets relate to efficiency?
Competitive, free markets produce goods near the equilibrium, maximizing both consumer and producer surplus.
When is a market in equilibrium?
A market is in equilibrium when demand equals supply, setting an equilibrium price and quantity.
Why is the demand curve also called the marginal benefit curve?
The demand curve reflects the marginal benefit a consumer gets from additional units of a good.
What do demand and supply represent in a market?
Demand reflects buyer preferences, while supply reflects the costs sellers are willing to incur.
What is a price ceiling?
A price ceiling is a government-set maximum price in the market, designed to benefit consumers by lowering prices below equilibrium.
What is a price floor?
A price floor is a government-set minimum price in the market, intended to help producers by setting prices above equilibrium.
Why do economists link efficiency to resource use?
Economists associate efficiency with making the best use of scarce resources.
What is total surplus?
Total surplus is the sum of consumer and producer surplus, representing net benefits to society.
Define consumer surplus.
: Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay.
Define producer surplus.
Producer surplus is the difference between what a producer is willing to receive (minimum cost) and what they actually receive.
How do government interventions affect market efficiency?
Government policies like market restrictions, price controls, taxes, and subsidies can decrease efficiency by distorting the price system.
How do taxes impact a market?
Taxes shift the supply curve up, increase prices, reduce quantity, and decrease both consumer and producer surplus.
What is deadweight loss?
waste of scarce resources caused by under- or overproduction, reducing total surplus.
How does a subsidy affect consumer and producer surplus?
A subsidy increases both consumer and producer surplus by allowing consumers to pay less and producers to receive more.
