Econ exam 2
What is a market failure?
It refers to the inability of the market to allocate resources efficiently up to the point where marginal social benefit equals marginal social cost.
t/f as the price of a good rises, producer surplus increases and as the price of a good falls producer surplus decreases
T
t/f economic analysis cannot provide a final answer to the question of whether the government should interfere in markets by imposing price ceilings and floors because it seeks to address positive questions such as what is
T
what is an eternality?
a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service
economies of scale
a firms long run average costs fall as it increases the quantity of output it produces
price ceiling
a legally determined maximum price that sellers may charge
Price Floor
a legally determined minimum price that sellers may receive
economic efficiency
a market outcome in which the MB to consumers of the last unit produced is equal to its marginal cost of production and is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum
When the marginal benefit equals the marginal cost of the last unit sold in a competitive market
an economically efficient level of output is produced.
externalities affect the economic efficiency of a market equilibrium...
by causing a difference between the private cost of production and social cost of production and the private benefit of consumption and the social benefit of production
why is the demand curve referred to as the marginal benefit curve?
it shows the willingness of consumers to purchase a product at different prices
In order to be binding a price floor
must lie above the free market equilibrium price.
A market demand curve reflects the
private benefits of consuming a product.
economic surplus is maximized when...
the MB of consumption is = to the MC of production
tax incidence
the actual division of the burden of tax
marginal benefit
the additional benefit from consuming one more unit
marginal cost
the additional cost of producing one more unit
private benefit
the benefit received by the consumer of a good or service
private cost
the cost borne by the producer of a good or service
consumer surplus
the difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays on a graph it is the area under the demand curve to price indicated
producer surplus
the difference between the lowest price a firm would be willing to accept and the price it actually receives
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. on a graph it is the area that is above the supply curve up to the price indicated.
Consumers are willing to purchase a product up to the point where
the marginal benefit of consuming a product is equal to its price
A positive consumption externality causes
the marginal social benefit to exceed the marginal private cost of the last unit produced by the private market.
Willingness to pay measures
the maximum price that a buyer is willing to pay for a good.
if a negative externality in production is present in a market then...
the private cost of production will be different than the social cost of production.
If, in a competitive market, marginal benefit is less than marginal cost,
the quantity sold is greater than the equilibrium quantity.
If, in a competitive market, marginal benefit is greater than marginal cost
the quantity sold is less than the equilibrium quantity.
deadweight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
diseconomies of scale
the situation in which a firms long run average cost rise as the firm increases input
What is a "social cost" of production?
the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product
social benefit
the total benefit from consuming a good or service including both the private benefit and any external benefit
social cost
the total cost of producing a good including both the private cost and any external cost
when there is a positive externality in producing a good or service...
too little of the good or service will be produced at market equilibrium
when there is a negative externality in producing a good or service....
too much of the good or service will be produced at market equilibrium
perfectly inelastic demand in relation to tax burden
total burden of tax for buyer
perfectly inelastic supply in relation to tax burden
total burden of tax for producer
the private cost of producing a good will differ from social cost....
when there is an externality such as acid rain generated by production of electricity
when will the private benefit from consuming a good differ from the social benefit?
when there is an externality such as fewer disease generated by consumption of vaccine
economic efficiency 2
where consumers surplus and producer surplus are maximized