Scheduled maintenance: Saturday, March 6 from 3–4 PM PST
Upgrade to remove ads
Only $2.99/month

ECON 110 Exam 2

Terms in this set (28)

What is efficiency?
Optimizing production or allocating a resource to best serve each individual or entity while minimizing waste and inefficiency.
Why a competitive market is efficient (short run and long run)
- Short run is efficient because it makes the total supply equal to the total amount of consumers wishing to demand.
- Long run is a perfectly competitive market so the price in the market is equal to the minimum of the long run average cost curve.
why should efficiency matter?
Efficiency matters because if it changes even slightly to benefit another it will upset the total balance of firms and individuals in the market.
how a competitive market works
A competitive market is one in which a large number of producers compete in order to satisfy the wants and needs of a large number of consumers. A competitive market means no single firm can dictate how the market operates.
Role of price
price determines quantity suppplied and quantity demanded
Role of profits
in a market economy, as profits increase, the number of suppliers and resources for making that good will increase
what happens in a domestic market when there is international trade
Nations specialize according to their comparative advantage. They are able to consume beyond their PPF.
Imports
goods produced abroad and sold domestically
Exports
goods produced domestically and sold abroad
Foreign Exchange Market
a market in which currencies of different countries are bought and sold
market distortions of otherwise competitive markets
Intervention in a given market by a governing body. Things such as price ceilings, price floors or tax subsidies.
price ceilings ​-- "too little" output (MC < MWTP)
​-- rationing problem
Maximum price can't go above it.
​price floors​-- "too much" output (MC > MWTP)
​-- disposal problem
The price floor has to be above the equilibrium price in order to be effective. A limit on how low the price can be charged for a good, commodity or service.
​taxes​-- "too little" output (MC [in terms of scarce resources]<MWTP)
Increases supply lowers demand tax revenue is created. Tax is paid by us consumers above equilibrium price tax paid by producer below equilibrium.
subsidies​-- "too much" output (MC > MWTP [in terms of "true" benefit])
Subsidy shifts supply down and right. Lowers price increases quantity. Demand is Government + Consumers
barrier to entry​-- MC = MWTP but "too little" produced because capital cannot move to markets with economic profits so there is no long-run supply response
Intended to keep others out of the market
prohibited markets​-- enforcement problem
​- different price and revenue effects when enforcing against suppliers and/or demanders
...
tariffs​-- "too little" specialization (loss in consumer surplus exceeds any gain in producer surplus)
...
quotas​-- "too little" specialization (loss in consumer surplus exceeds any gain in producer surplus)
...
1)​WHY a "distortion"
​2)​examples of each
​3)​the effect of each distortion on an otherwise competitive market
​actual price
​amount bought and sold
​amount demanded
​amount supplied
​long run effects
​4)​size of these effects
​5)​the effect of each distortion on efficiency
​6)​other consequences ("unintended effects")
​7)​what are the "policy" incentives (i.e., who wins and who loses)
...
market failures/pathologies
...
monopoly​-- "too little" output (MC < MWTP)
...
negative externality​-- "too much" output (true or social MC > MWTP)
...
positive externality​-- "too little" output (MC < true or social marginal benefit)
...
public good​-- "too little" output (MC< true marginal benefit)
​-- free riding problem (MWTP < true marginal benefit)
...
1) ​WHY a "failure"
​2)​examples of each
​3)​the effect of each failure compared with the outcome in a competitive market
​actual price
​amount bought and sold
​amount demanded
​amount supplied
​long run effects
​4)​size of these effects
​5)​the consequences for efficiency
​6)​what are the efficiency-enhancing public policy options and their effects
​7)​are there other solutions
...
reason for market distortions and market failures/pathologies
...
1)​prices provide incentives AND prices convey information
​2)​suppliers and demanders respond to incentives AND rely on the information
​conveyed
​therefore if prices are "wrong" (because of distortion or market failure),
​decisions will be "wrong" (relative to the efficient outcome)
...
YOU MIGHT ALSO LIKE...