Market Efficiency Flashcards
When is a market efficient
When there is equal producer and consumer surplus
Consumer surplus
The measure of the wellbeing of consumers,
an increase in consumer surplus means their economic welfare has increased
Difference between extra benefit/satisfaction from buying a product at the price they have to pay
Area bellow d curve above equilibrium price
If consumer surplus falls
Price has risen, they are less willing to buy more, satisfaction falls as welfare decreases
Producer surplus
The area above the supply line bellow the price point
When you sell above what it costs to produce, make a profit
If price increases producer surplus increases
Total surplus
Community surplus
Total welfare
TS= consumer surplus + producer surplus TS= total benefit - total costs
Max total surplus
Equilibrium
Consumer surplus or producer surplus more important
Consumer
Consumer is king, producers role is to meet demand, seeing an opportunity to fill demand and in turn make profit
In an unregulated free market consumer surplus is more important because without it there would be no producer surplus
Market efficiency
The economic use of resources used to meet an economies demand for goods and services
Marginal benefit
Extra pleasure, benefit or satisfaction consumer receives from consumption of a product
Market price
The clearance price, where Qs = Qd
Marginal cost
Extra production cost of one more unit of output
Deadweight loss
Difference between the actual level of welfare generated in a market and max possible level of welfare
When will deadweight loss occur
Market not operating at most efficient point, equilibrium
Could be: under-production (shortage) or over-production (surplus) or prices set above or bellow e point
Market failure
Resources not allocated in an optimal manner, thus community surplus is not maximised
Can occur: p has a monopoly power or market activity= externalities or side-off effects on by standers
Can create deadweight loss
Market power
The ability of a firm to adjust the price in order to increase profit
Exist as- monopolies and oligopolies
Eg. Grocery industry
Free market
Large # of firms Price takers Homogeneous products Low barriers of entry Eg. Agricultural sector- wheat farmers and fruit pickers
Monopolistic competition
Many firms Price takers Products differ slightly Low barriers of entry Eg. Restaurants and hair salons
Oligopoly
Few firms Price makers Similar products High barriers of entry Eg. Petrol, food stores (Coles wollies)
Monopoly
One firm Total price makers Only products Extremely high barriers of entry Eg. Telstra, western power, water Corp
Externalities
External side effects of economic activity experienced by a third party
Positive externalities
Under consumed
External benefit received by third party due to ec transactions
Eg. Edu (society benefits by a more skilled and productive workforce)
Gym membership (health benefits, benefits employer fewer sick days)
Govt policy to correct- pay a subsidy to encourage
Negative externalities
Over consumed and under priced
Occur when ec actions from production or consumption create an external cost
Eg. Smog and air pollution from cars, congestion due to high traffic, noise pollution from lawn mowers, cigarette passive effects on non smokers, fossil fuels contribution to global warming and climate change
Govt policy- impose tax to deter
Anti-competitive behaviour
Any agreements or arrangements between firms that seek to restrain competition and thereby remove the automatic regulation that competitive markets achieve
Fix prices, divide the market, or prevent the entry of new firms
Firms can then collectively act as a monopoly or oligopoly
Result in market failure and DWL
Examples of anti competitive behaviour practices
Cartels Misuse of market power Exclusive dealing Resale price maintenance Predatory pricing Collective bargaining Boycotts
Effect of market power on
Consumer
Producer
Total Surplus
C- reduces
P- increases
TS- creates DWL so reduces
ACCC
Australian Competition and Consumer Commission
Independent commonwealth statutory authority whose role it is to enforce the competition and consumer act 2010, promoting competition for the benefit of all Australians
Polices anti-competitive behaviour
Policy options to influence market power
ACCC enforcing rules
-increasing competition
Could be: fines
Not allow a merger to take place
Key goals of ACCC
- Maintain and promote competition and remedy market failure
- Protect interest and safety of consumers and support fair trading in markets
- Promote eclly efficient operation of, use of and investment in monopoly infrastructure
- Increase our engagement with the broad range of groups affected by what we do
