Slide 4 Flashcards
what is the difference between value and price
value: is what we get
price: is what we pay
true or false: The value of one more unit of a good or service is its marginal benefit
true
how do we measure the maximum price
the maximum price that a person is willing to pay
what is the difference between individual demand and market demand
individual demand
- relationship between the price of a good and the quantity demanded by one person
market demand
- relationship between the price of a good and the quantity demanded by all buyers in the market
true or false: market demand/supply curve is the horizontal sum of the
individual demand/supply curves
true
what is consumer surplus, how is it measured
the excess of the benefit received from a good over the amount paid for it
measured by the area under the demand curve and above the price paid, up to the quantity bought
formula for calculating the area of a triangle
to businesses, what is the difference between cost and price
cost: what the producer gives up
price: what the producer receives
what is the difference between individual supply and market supply
individual supply : relationship between the price of a good and the quantity supplied by one producer
market supply :
relationship between the price of a good and the quantity supplied by all producers
what is producer surplus
how do we calculate it
the excess of the amount received from the sale of a good over the cost of producing it, aka profit
measured by the area below the market price and above the supply curve
formula for calculating the area of a triangle
true or false: at equilibrium the consumer and producer surplus is as large as they can be
true
what is the relationship between MSB and MSC if production is less than the equilibrium
if production is more than the equilibrium
MSB > MSC
MSC > MSB
when are resources used efficiently in a supply and demand graph
at equilibrium
when does market failure arise
when the market has inefficient outcome. ie. a skewed supply and demand curve
either there is too little of an item produced or too much of an item is produced
what is deadweight loss
it is equal to the decrease in total surplus (total surplus = consumer + producer surplus)
true or false: externalities can be a source of market failure
true
define externality
an externality is a cost or benefit that comes from external actions that will affect the individual or firm
define negative externality
it happens when producers impose cost on third parties who are not directly involved.
when we are producing too much.
define positive externalities
occurs when people who are not directly involved in the transaction receives benefits
how does government intervention help achieve economic efficiency
if it is a negative externality, the government can use 1. direct control or 2. Pigovian taxes
if positive externalities, the government can use subsidies or government provision
describe government intervention via direct controls
the government will pass legislation limiting the activity to reduce production. the control will raise the marginal cost of production and will shift the supply curve leftwards
describe government intervention via pigovian taxes
pigovian taxes force mandatory taxes on the related good. manufacturers will either pay taxes or try to develop substitutes, causing an increase in the marginal cost and shift the supply curve left
describe government intervention via subsides
for buyers: eg. coupons, to encourage demand
for producers: incentivize them to produce more by giving money/reducing costs
describe government intervention via government provisions
The government will step in and provides goods for free
