Slide 4

Question 1

what is the difference between value and price

Answer 1

value: is what we get

price: is what we pay

Question 2

true or false: The value of one more unit of a good or service is its marginal benefit

Answer 2

true

Question 3

how do we measure the maximum price

Answer 3

the maximum price that a person is willing to pay

Question 4

what is the difference between individual demand and market demand

Answer 4

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

Question 5

true or false: market demand/supply curve is the horizontal sum of the
individual demand/supply curves

Answer 5

true

Question 6

what is consumer surplus, how is it measured

Answer 6

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

Question 7

to businesses, what is the difference between cost and price

Answer 7

cost: what the producer gives up

price: what the producer receives

Question 8

what is the difference between individual supply and market supply

Answer 8

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

Question 9

what is producer surplus

how do we calculate it

Answer 9

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

Question 10

true or false: at equilibrium the consumer and producer surplus is as large as they can be

Answer 10

true

Question 11

what is the relationship between MSB and MSC if production is less than the equilibrium

if production is more than the equilibrium

Answer 11

MSB > MSC

MSC > MSB

Question 12

when are resources used efficiently in a supply and demand graph

Answer 12

at equilibrium

Question 13

when does market failure arise

Answer 13

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

Question 14

what is deadweight loss

Answer 14

it is equal to the decrease in total surplus (total surplus = consumer + producer surplus)

Question 15

true or false: externalities can be a source of market failure

Answer 15

true

Question 16

define externality

Answer 16

an externality is a cost or benefit that comes from external actions that will affect the individual or firm

Question 17

define negative externality

Answer 17

it happens when producers impose cost on third parties who are not directly involved.

when we are producing too much.

Question 18

define positive externalities

Answer 18

occurs when people who are not directly involved in the transaction receives benefits

Question 19

how does government intervention help achieve economic efficiency

Answer 19

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

Question 20

describe government intervention via direct controls

Answer 20

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

Question 21

describe government intervention via pigovian taxes

Answer 21

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

Question 22

describe government intervention via subsides

Answer 22

for buyers: eg. coupons, to encourage demand

for producers: incentivize them to produce more by giving money/reducing costs

Question 23

describe government intervention via government provisions

Answer 23

The government will step in and provides goods for free