term 2 lecture 5: perfect competition (welfare analysis and long run) Flashcards
what is technically efficient?
no wastage in production
what is allocative efficiency?
marginal willingness to pay = marginal social cost of production of every good
what is the effect of taxs on the market?
they cause underproduction. they produce at a lower quantity and a higher price. it will shift the supply curve upwards reducing the consumer surplus and producer surplus plus a deadweight loss to society
what is the dead weight loss?
the area between the old and new supply curve and between the old equilibrium output and the new equilibrium output
what is the effect of a subsidy given to the producer?
it will shift the supply curve to the right
what is the effect of the subsidy given to the consumer?
it will shift the demand curve upwards
what is the equation for the demand curve when a subsidy is applied to the consumer?
p=a -bY + S
what is the size of the subsidy?
size of per unit subsidy x quantity at new equillibrium
what is the consumer surplus for the subsidy given to consumers?
the area under the original demand curve until the new equilibrium quantity.
why do governments intervene?
despite allocative inefficiencies, governments intervene to redistribute gains in a desired way. sometimes you need to create a level playing field for market participants
what is the long run equillibrium?
price must be equal to the lowest LAC, each firms supplies MES output at which the LAC is minimum. the number of firms that will operate in the equilibrium is given by the demand curve. the social welfare is equal to the consumer welfare.
