Micro Chapter 4 summary

A mismatch of information

Asymmetric information occurs when either a buyer or a seller knows more about a product than the other

Gains from trade

Markets exhibit efficiency when every buyer and every seller eager to buy and sell goods is able to do so

Existence of external benefits or costs

Markets tend to provide too little of products that have external benefits, and too much of products with external costs

Existence of public goods

Public goods are nonrival and nonexclusive. Meaning: Consumption does not diminish ability to consume Once a good is provided, others cannot be excluded from it

Producer Surplus

The difference between the price a seller receives and its marginal cost. For a market, producer surplus is the area between the market price and the supply curve.

Total Surplus

The sum of consumer and producer surplus in a market. Total surplus is maximized when a market is at equilibrium.

Lack of Competition

When a firm faces little to no competition, it has an incentive to raise prices

Market Failure

When markets fail to produce the socially optimal output

Price ceiling

is a maximum price for a good. A binding price ceiling appears below equilibrium and causes a shortage

Price Floor

is a minimum price for a good. A binding price floor appears above equilibrium and causes a surplus.

Consumer surplus

is the difference between a person's willingness-to-pay and the price paid. For a market, consumer surplus is the area between the demand curve and the market price.

Deadweight loss

occurs when prices deviate from equilibrium

Economic efficiency is measured by____

the gains that consumers and producers achieve when engaging in an economic transaction.

Gains from trade are measured by____

the total surplus