Market, prices and competition Flashcards
What is welfare economics?
Welfare economics is the study of how the allocation of resources and goods affects social welfare. This relates directly to the study of economic efficiency and income distribution, as well as how they affect the overall well-being of people in the economy.
Difference between subjective and objective well-being
Subjective well-being: happiness and satisfaction as perceived by the individual.
Objective well-being: measure of the quality of life at an aggregate level, determined on the basis of quantitative indicators (e.g. level of education, income, life expectancy, etc.).
What is allocative efficiency?
Whereas productive efficiency is primarily concerned with making the most use out of available resources, allocative efficiency is more concerned about how scarce resources are allocated with regards to society’s preferences.
Allocative efficiency is trying to reach a socially optimal allocation of scarce resources. Allocative efficiency is reached when no one can be made better off without making someone else worse off. This is called Pareto efficiency.
Allocative efficiency means to use scarce resources to get the maximum total benefits to both consumers and producers.
Allocative efficiency occurs when the value that consumers place on a good or service (amount they are willing to pay) equals the marginal cost of the scarce resources used up in production.
The main condition required for allocative efficiency is for market price to equal marginal cost of supply.
What is the role of producer and consumer?
The Producer must ensure that the amount of money received for the goods or services offered (revenue) exceeds the cost of production and the difference represents the profit
↘ Maximizing profits is the primary goal of every business.
The Consumer defines his behavior in the market upon the observation of prices
↘ Maximizing individual utility is the primary goal of every consumer
Where the objectives of producers and consumers meet there is a situation of equilibrium
↘ It is only in the case of perfect competition, that the market equilibrium show also allocative efficiency.
Perfect vs imperfect competition
In perfect competition non single firm controls the prices, all firms sell the same products and services and they all have the same industry knowledge, and there is a large number of suppliers and buyers.
If any of the above factors is absent, it’s an imperfect competition. For example, in monopoly, only one seller exists. In an oligopoly there are many buyers but only a few sellers (like high tech industry).
What is a price taker?
A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. Due to market competition, most producers are also price-takers. Only under conditions of monopoly or monopsony do we find price-making.
Monopoly vs oligopoly?
With monopoly there is just one seller, who can influence the market price by varying the amount put onto the market.
Oligopoly is where there are many price-taking buyers, and a few sellers who are not price takers.
What is a market?
Market in economics: a system in which buyers and sellers of something interact: buyers determine the demand and sellers the supply.
Rather than a place, it can be thought of as a set of arrangements that makes such exchanges possible. Market participants, as both buyers (consumers) and sellers (producers), can be individuals, firms and governments.
The basic elements of market analysis are the demand function and the supply function.
What is the demand function?
The demand function is the relationship between the quantity that buyers wish to buy and price, given that other influences on the quantity that buyers wish to buy are held constant.
What a demand function shows is how marginal benefit declines as consumption increases, i.e. what people are willing to pay for a marginal increase in consumption.
What is the supply function?
The supply function is the relationship between the quantity that sellers wish to sell and price, given that other influences on the quantity that sellers wish to sell are held constant.
Generally, the supply function slopes upwards, so that the quantity offered for sale increases with increases in price and vice versa.
The supply function can also be interpreted, as showing how the marginal cost of production increases as the level of production increase
What is market equilibrium?
A market is in equilibrium if at the market price the quantity demanded is equal to the quantity supplied.
At the market equilibrium marginal benefit (MB) is equal to marginal cost (MC), and this is why the equilibrium is efficient.
Explain the demand curve
Demand curve = total quantity that all consumers together want to buy at any given price. Represents the willingness to pay (WTP) of buyers. Each individual buyer/consumer has his/her own WTP
Explain the supply curve
Supply curve = total quantity that all firms together would produce at any given price. Represents the willingness to accept (WTA) of sellers. Sellers may have different reservation prices.
What is marginal cost?
In economics, the marginal cost of production is the change in total production cost that comes from making or producing one additional unit. To calculate marginal cost, divide the change in production costs by the change in quantity.
What is the marginal benefit?
Marginal benefit is a small but measurable benefit to a consumer if they use an additional unit of a good or service. Marginal benefit usually declines as a consumer decides to consume more of a single good.
