Topic 7- The Efficiency of Competitive Markets Flashcards
Positive Analysis vs Normative Analysis
What is
Wat should be (Value Judgements)
What is absolutely amazing about market equilibrium?
It maximizes Consumer and Producer surplus!!!!BOTH
Consumer Surplus
The amount a buyer is willing to pay-The amount actually paid
Logic behind Consumer Surplus?
Find the Willingness to pay of any consumer
If I buy a good for elss than my willingness to pay, I AM HAPPY! SURPLUS
If I buy a good exactly equal to my willingness to pay= neutral it doesn’t matter either way
If a good is more than Iam willing to pay= no surplus
What is consumer surplus closely related to?
VISUAL?
The Demand Curve for that Good
IT LOOKS LIKE A STAIR CASE WHEN DISCRETE (KNOWN AMT OF BUYERS)
IT LOOKS LIKE A CONTINUOUS GRAPH (wHEN MARKET DEMAND)
How to use the demand curve to calculate consumer surplus?
The AREA! above the price and below the demand curve= consumer surplus
hOW TO KNOW IF CONSUMER SURPLUS INCREASED?
Look if the area under the curve increased (Demand increase)
So is consumer surplus a great way to make policy?
No because ‘willlingness to pay’ is not the best determinant of societys welfare
Drug addics are willing o pay everyhting for drugs, but that is not where policy makers should seek to maximize consumer surplus
but usually okay
Consumer surplus TRIANGLE define:
-top left corner
-bottom left corner
-What you are willing to pay
-What you actually end up paying
What is producer surplus measured off of?
What is the cost to the supplier
Formula for Producer Surplus:
What is producer surplus measured off of?
What is the OOPORTUNITY cost to the supplier
What is producer surplus measured off of?
What is the OOPORTUNITY cost to the supplier
What is producer surplus measured off of?
What is the OOPORTUNITY cost to the supplier
Formula for Producer Surplus
Amount seller is paid- cost of production
What does Consumer Surplus and Producer Surplus measure?
The amount each party can save
On the step curves (discrete curves) where is the surplus for demand curve and supply curve
Supply curve is above the steps
demand curve is below the steps
What area on the supply curve shows producer surplus
Area below the price and aboce the supply curve
Why does producer surplus increase gradually?
Because at higher prices new producers enter the market to sell goods
Why does consumer surplus increase gradually?
Because at lower prices more people want to buy
Total Surplus Formula
=(Consumer Surplus)+(Producer Surplus)
or
(Value to buyers-Amount Paid)+(Amount paid to Sellers-Cost of Production)
ands simplify further
(Value to Buyers)-(Cost of Production)
Goal of markets, and how?
TO BE EFFICIENT:
-PRODUCTIVE EFFICINECY: produced by the seller w lowest opp cost
-ALLOCATIVE EFFICIENY: revieved by the buyer with most value of the good
Even though every consumer gets a differnt amount of surplus form the purchased good (Depending on preferences),,,,,
The marginal benefit they recieve from the last piece of good pruchased= the market price of that good
THE MARGINAL BENEFIT OF THE LAST ONE IS EQUAL FOR EVERYONE
Even though every PRODUCER gets a differnt amount of surplus from the good they produce (different costs of production),,,,,
THE MARGINAL COST OF TH ELAST GOOD IS SAME FOR ALL (MARKET PRICE)
Why is equilibrium the perfectly competitive market?
Because the Market Price= Marginal Benefit to Cons #1= Marginal Menefit to Cons #2= Marginal Cost to Prod #!= Marginal Cost to Prod #2
NO WAY TO REALLLOCATE THE DEMAND AND SUPPLY, THIS IS MOST EFFICIENT
What are two assumptions we make to analyze if the amrket is efficient?
- market perfectly competitive (no market power)
- that the outcome of the market only impact the buyer/seller in that interaction (no externalities)
Why does market power keep markets non competitive
Bc single powerful seller holds prices and quantity away from market equilibrium
Why does externalities impact how efficient a market is?
Bc then the welfare implication of the good is more than jus value to buyers and cost of production to sellers (others are at stake)
Other titles for Supply and demand curves
WILLINGNESS TO PAY CURVE (DEMAND)
COST OF PRODUCTION CURVE (SUPPLY)
resource allocation methods
Market price
I Command
I Majority rule
I Contest
I First-come, first-served
I Lottery
I Personal characteristics
I Force
Command
Command system allocates resources by the order (command) of
someone in authority.
I A command system works well in organizations with clear lines of
authority but badly in an entire economy.
Market Price
When a market allocates a scarce resource, the people who get the
resource are those who are willing to pay the market price.
Most of the scarce resources that you supply get allocated by market
price.
Majority Rule
Majority rule allocates resources in the way the majority of voters
choose.
Societies use majority rule for some of their biggest decisions
Contest
A contest allocates resources to a winner (or group of winners).
I A contest works well when the efforts of people are hard to monitor
and reward directly.
First-Come, First-Served
First-come, first-served allocates resources to those who are first in
line.
I First-come, first-served works best when scarce resources can serve just
one person at a time in a sequence
Lottery
Lotteries allocate resources to those with the winning number.
I Lotteries work well when there is no effective way to distinguish among
potential users of a scarce resource
Personal Characteristics
Personal characteristics allocate resources to those with the ”right”
characteristics.
However, this method sometimes gets used in unacceptable ways
Force
Force provides an effective way of allocating resources - establishes the
legal framework in which voluntary exchange can take place in markets.
It also plays a role in allocating resources - wars.
Welfare economic
The study of how the allocation of resources
affects economic well-being
Marginal social benefit
DEMAND CURVE
Marginal social cost
SUPPLY CURVE
Underproduction
When you are at market equilibrium, and quantity then shifts from eqilibrium quantity to a quantity to the LEFT of equilibrium quantity (less than equlilbrium wuantity being produced)
INEFFICIENTLY LOW
Overproduction
When you are producing at a quantity that is more than market equiilibrium quantity!!!! produceign more than the left triangle!!
INEFFICIENTLY HIGH
What type of loss is overproduction and underproduction
A SOCIAL LOSS
When using supply and demand curves to find consumer surplus/producer surplus/deadweight loss
and there is SHORTAGE OR SURPLUS!!!!!!!!!!
BE VERY CAREFUL!!! THE AREA WHERE THE SURPLUS/SHORTAGE IS OCCURING IS NOT A PLACE WHERE THERE IS ANY SURPLUS
what you have to do is draw a line where the quantity produced is, AND WHERE QUANTITY DEMANDED IS, you need BOTH AREAS! FOR A SURPLUS BITCH
(triangle dwl)
what do price ceilings and price floors fo to consumer surplus/prod surplus
create DEADWEIGHT LOSS!!! WHEN CALCULATING REMMEBER TO ONLY DO IT FROM WHERE THEREIS QSUPPLIES ANDDDDD Q DEMANDED
what you have to do is draw a line where the quantity produced is, AND WHERE QUANTITY DEMANDED IS, you need BOTH AREAS! FOR A SURPLUS BITCH
Where is the DWL in the supply and demand chart, that is caused by price ceiling and price floors?
LEFT TRIANGLE!!!! LIKE LEFT CORNER!!!
