AP Micro - Chapter 6 (6.2-6.4)
Nozick what did he write fairness - 2 rules
Anarchy, State, and Utopia 1. state must establish and protect private property rights 2. goods and services and the services of factors of production may be transferred from one person to another only by voluntary exchange with everyone free to engage in such exchange
Total Surplus
Consumer Surplus + Producer Surplus (triangle)
T/F when we look at marginal benefit we want to look at the producer
F - consumer
let's say marginal cost of 30th good is $3 T/F supplier will be willing to supply 30th good if price was < $3
FALSE
How to determine if the market is efficient
MB = MC delivers an efficient use of resources competitive equilibrium allocates resources to the activities that create the greatest possible value --> it is efficient
Underproduction (MC and MB)
MB > MC
Overproduction (MC and MB)
MC>MB
Sources of Market Failure: Taxes and Subsidies
Taxes: increase the prices paid by buyers and lower the prices received by sellers --> underproduction subsidies: decrease prices paid by buyers and increase prices received by sellers --> overproduction
Adam Smith - "Invisible Hand"
The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically is the invisible hand. no government auditor monitors producers or consumers SENDS RESOURCES TO THE USES FOR WHICH THEY HAVE THE HIGHEST VALUE all driven by SELF INTEREST
big tradeoff
a tradeoff between efficiency and fairness that recognizes the cost of making income transfers need to tax people with high incomes to bring money to those with low incomes
"marginal"
additional or change in
possible remedy for common resources
allocate by majority rule
possible remedy for public goods
allocate by majority rule
market failure
an inneficient market outcome underproduction or overproduction
possible remedy for high transaction costs
common or first-come, first-served
marginal analysis
compare the marginal benefit of an action to the marginal cost of the action
deadweight loss
decrease in total surplus that results from an inefficient underproduction or overproduction social loss
if MC>MB then... take/don't take that action
don't take that action
Sources of Market Failure: Externalities
externality: a cost or a benefit that affects someone other than the seller and the buyer of a good
As quantity increases Marginal Cost _______
increases
how to find the market price
intersection between Supply and Demand curve
two conflicting ideas to fairness
it's not fair if the rules aren't faire it's not fair if the result isn't fair
sometimes we can buy products at a price less/more than we are willing to pay
less
Value
marginal benefit maximum price that people are willing to pay for another unit of the good or service value on the demand curve
at efficient level of production total surplus is __________
maximized
the demand curve shows the _________ price that people are willing to pay when there is a given quantity
maximum
Possible Remedy for Taxes and Subsidies
minimize deadweight loss by majority rule
Possible remedy for externalities
minimize deadweight loss by majority rule
Marginal cost is the _______________ price for which the supplier will produce a good
minimum
Sources of Market Failure: Monopoly
monopoly: a firm that is the sole provider of a good or service; has no competitors - underproduction
when buyers and sellers seek their self-interest --> the social interest is served
ok
sources of market failure
price and quantity regulations taxes and subsidies externalities public goods and common resources monopoly high transaction costs
price
"what we pay"
Sources of Market Failure: Price and quantity regulations
price regulations - put a cap on the rent a landlord is permitted to charge and minimum wage --> sometimes block the price adjustments that balance QD and QS and lead to underproduction Quantity regulations --> regulate amt that a farm is permitted to produce also leads to underproduction
Sources of Market Failure: Public Goods and Common Resources
public good - benefits everyone and no one can be excluded from its benefits (Ex: national defense) - "free rider problem" common resource: owned by no one but used by everyone "tragedy of the commons"
possible remedy for monopoly
regulate by majority rule
Possible Remedy for price quantity regulations
remove regulation by majority rules
What is the amount paid graphically
square/rectangle below demand curve, up to equilibrium price and quantity (same as total revenue)
Total Cost
sum of the individual costs (area below the supply curve up to the market price/quantity)
if MB>MC then... take/don't take that action
take that action
marginal cost
the cost of producing one more unit of a good increases
producer surplus
the price of a good in excess of the marginal cost of producing it, summed over the quantity produced Price actually received (market price) - minimum price that supplier is willing to pay to sell the unit
total benefit
total value all consumers derive area of trapezoid under the demand curve up to the market price and quantity Total Benefit = Consumer Surplus + Total Revenue/Amt Paid
Sources of Market Failure: High Transaction Costs
transaction costs: the opportunity costs of making trades in a market when transaction costs are high - market might underproduce
deadweight loss from underproduction
triangle from the underproduction quantity to the market price/quantity had the resources to produce more MB > MC desirable goods not produced
deadweight loss from overproduction
triangle to the right from market price/quantity to the overproduction quantity don't have enough consumers MC > MB loser goods being produced
price (sellers)
what seller receives when the good is sold
Cost (sellers)
what sellers give up to produce the good
consumer surplus
when a consumer buys something less than they are willing to pay the marginal benefit from a good or service in excess of the price paid for it, summed over the quantity consumed (MB-Equilibrium price) (maximum price consumer pays - price actually paid)
