Chapter 4 Review Questions
What is a black market?
A market in which buying and selling occur at prices that violate government price and regulations: Stems from governmental attempts to regulate prices through price floors/ceilings, and buyers and sellers further actions finding away around such.
What is economic efficiency?
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
How does producer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, producer surplus increases, and as the prices of a good falls, producer surplus decreases.
What is marginal benefit?
The additional benefit to a consumer from consuming one more unit of a good or service. Ex. suppose there are only four consumers in the market for chai tea: Theresa, Tom, Terri, and Tim. Because these four consumers have different tastes for tea and different incomes, the marginal benefit each of them receives from consuming a cup of tea will be different. Therefore, the highest price each is willing to pay for a cup of tea is also different.
What is marginal cost?
The change in a firm's total cost from producing one more unit of a good or service.
What is consumer surplus?
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays for it: measures the dollar benefit consumers receive from buying goods or services in a particular market. (equal to the area below the demand curve and above the market price)
What is producer surplus?
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives: measures the dollar benefit firms receive from selling goods or services in a particular market. (equal to the shaded area above the supply curve and below the market price)
What is deadweight loss?
The reduction in economic surplus resulting from a market not being in competitive equilibrium - Economic Inefficiency!: Ex. When the price of chai tea is $2.20 instead of the competitive equilibrium price of $2.00, the number of cups consumers are willing to buy per day falls from 15,000 to 14,000, consumer surplus declines, and producer surplus increases.
What is economic surplus?
The sum of consumer surplus and producer surplus in a market; maximized when a market is in competitive equilibrium.
Why is the supply curve referred to as a marginal cost curve?
The supply curve is a curve that shows the relationship between the price of a product and the quantity of the product supplied, and is referred to as a marginal cost curve because it shows the willingness of firms to produce goods or services at different prices, and displays change in a firm's total cost from producing one more unit of a good or service.
Why do economists define efficiency the way that they do?
To: a) help policymakers understand the negative consequences of taxes, b) to illustrate the benefits of a competitive market equilibrium, c) to help policymakers understand the negative consequences of price ceilings, and d) to help policymakers understand the negative consequences of price floors.
How does consumer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, consumer surplus decreases, and as the price of a good falls, consumer surplus increases.
Why is the demand curve referred to as a marginal benefit curve?
Because it shows the willingness of consumers to purchase a product at different prices; exemplifies the additional benefits they receive in consuming one more unit of a good or service, as a result of their demands.
Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors?
Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is."
Under what circumstances do black markets arise?
In reaction to binding price ceilings; Ex. rent control
Do producers tend to favor price floors or price ceilings? Briefly explain.
Price FLOORS, because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
Why do some consumers tend to favor price controls while others tend to oppose them?
Price ceilings generate shortages. Consequently, the consumers who obtain the product at lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of shortage.
