Week 4 - Efficiency Flashcards
If you graph demand and supply, where is the area with gains from trade
On the left of equilibrium, there is a net benefit to the consumer which can be transferred. Marginal benefit exceeds marginal cost.
At e, there are no further gains to be made
Formula for Total surplus (gains from trade)
Total surplus = Total benefit - total variable costs
Area to the left of e
Why can’t voluntary trade make you worse off
Otherwise, you would not agree to it :)
What is the 1st fundamental theorem of welfare?
Any competitive equilibrium is Pareto efficient as if the only parties affected by a transaction are voluntary participants, it can’t harm them.
Define a competitive market
A competitive market is one where there are many buyers and sellers who are price takers and have a negligible influence on price.
What are the three things that happen in a perfectly competitive market?
1) all goods are identical
2) buyer can buy as much as they want
3) sellers can sell as much as they wany
Formula for competitive equalibrium
Quantity demanded = quantity supplied
When does a surplus occur
When supply exceeds demand. Suppliers will cut prices to try to increase sales.
What is the law of supply and demand?
The price of any good will adjust to bring the supply and demand into balance
Can good news for farms e bad new for farmers
Yes. For example, while a new grain may increase productivity, if all farmers use it supply will increase (shift out). In the case of relatively inelastic demand, the price will fall and the increase in demand will not cover it leading to falling revenue and producer surplus.
Why did OPEC fail to keep prices high
In the 1970s, OPEC raised prices by jointly limiting supply. This failed the second time as elasticity is larger in the longer term. People were able to adjust to the first change by switching cars, transport and finding other heat sources.
Do drug bans increase drug related crime
Since demand for drugs is inelastic (addictive), increasing the risk, and therefore, cost associated with supplying drugs may increase crime as addicts turn to theft to be able to afford them. The decrease in demand is not enough to offset the increase in price and revenue to dealers increases.
Define Pareto Efficieny
Pareto efficiency is based on the concept that a situation is improved only when at least on part benefits from it without harming anyone.
What is a Pareto Efficient point?
A point where movement would cause Pareto harm.
Is utility ordinal?
Yes. Utility is ordinal so the ranking is all that matters. It is also inter-personally non-comparable.
