4.2 The Efficiency of Competitive Markets

Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the diagram to the​ right, deadweight loss is equal to the​ area(s):

C​ & E.

Economists define economic efficiency in this way A. to help policymakers understand the negative consequences of taxes. B. to help policymakers understand the negative consequences of price ceilings. C. to illustrate the benefits of a competitive market equilibrium. D. to help policymakers understand the negative consequences of price floors. E. all of the above.

E. all of the above.

Briefly explain whether you agree with the following​ statement: ​"A lower price in a market always increases economic efficiency in that​ market."

I​ disagree, because economic efficiency declines if price falls below the market equilibrium.

Economic surplus is the sum of consumer surplus and producer surplus. True or False

True

Refer to the graph to the right. When​ 15,000 cups of tea are produced and consumed per​ month, which of the following is​true?

A. The marginal benefit to buyers of the last cup of tea is equal to the marginal cost of producing the last cup of tea. B. The sum of consumer and producer surplus is maximized. C. he level of output is economically efficient. D. All of the above are true. *Correct answer*

Economic efficiency A. is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum. B. is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. C. is a market outcome in which every individual is better off than they would be at any other market outcome. D. both a and b. E. all of the above

D. both a and b. (A. is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum. B. is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production.)

According to a Wall Street Journal​ article, restaurant​ chains, including​ Subway, McDonald's and​ Chick-fil-A, have begun serving only chickens that were raised without being fed antibiotics. Using this method of raising chickens increases their cost. Suppose that consumers react to the news of restaurants selling​ antibiotic-free chicken sandwiches by increasing their demand for the sandwiches. Refer to the graph at right depicting the market for chicken sandwiches. Assume the initial equilibrium occurs at point​ 'A'. The events described result in an increase in demand ​(D1 to D2​), and a decrease in supply. The the new supply curve is somewhere to the left of S1. Under what conditions will the economic surplus increase in the market for chicken​ sandwiches?

If the supply shifts to the left less than the demand shifts to the​ right, the area of economic

Briefly explain whether you agree with the following​ statement: ​"If consumer surplus in a market​ increases, producer surplus must​ decrease."

The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase by decreasing deadweight loss.

An article about record high avocado prices discussed how avocado crops had suffered from hot​ weather, droughts, and an invasive beetle that kills avocado trees. Use a demand and supply graph of the avocado market to illustrate the effect of the hot​ weather, droughts, and invasive beetle. How are producer surplus and consumer surplus​ affected? Refer to the graph at​ right, and the shaded areas designated by letters A through N. a. The impact of the hot​ weather, drought, and an invasive beetle results in a consumer surplus in the market for avocados represented by​ area(s) b. The impact of the hot​ weather, drought, and an invasive beetle results in a loss of producer surplus equal to areas c. There is a gain of producer surplus equal to​ area(s)

a. A b. J, F, G c. B

Using the graph to the​ right, explain why economic surplus would be smaller if Q1 or Q3 were the quantity produced than if Q2 is the quantity produced. A. Economic surplus at Q1 would be smaller than at Q2 because if Q1 units of output were produced, then some units for which marginal benefit is _________marginal cost would ___ produced B. Economic surplus at Q3 would be smaller than at Q2 if Q3 units were produced, then some units for which marginal cost is _____ marginal benefit would _______ produced

a. greater than; not be b. greater than; be

Economic surplus in a market is the sum of​ _____ surplus and​ _____ surplus. In a competitive​ market, with many buyers and sellers and no government​ restrictions, economic surplus is at a​ _____ when the market is in​ _____

consumer; producer; maximum; equilibrium

In the diagram to the​ right, marginal benefit is ______________marginal cost at output level Q2 This output level is considered economically _________________

is equal to; efficient

A student​ argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is​ largest." This statement is false because

the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.

Economic surplus is maximized when

the marginal benefit of consumption is equal to the marginal costs of production.

When a competitive market is in​ equilibrium, what is the economically efficient level of​ output?

the output level where marginal cost is equal to marginal benefit

Deadweight loss is

the reduction in economic surplus resulting from a market not being in competitive equilibrium.

Refer to the graph to the right. Which of the following represents the deadweight loss when the price of tea is​ $2.20 per​ cup?

Area C​ + E

Briefly explain whether you agree with the following​ statement: ​"If at the current quantity marginal benefit, is greater than marginal cost, there will be deadweight loss in the market. ​ However, there is no deadweight loss when marginal cost is greater than marginal​ benefit."

The statement is incorrect. If marginal cost is greater than marginal benefit​ (just as when marginal benefit is greater than marginal​ cost), there will be deadweight loss.