Ch6 econ

What are 3 typical characteristics of non-market economies

1. Constraints exist on buyers/ sellers= decrease profit 2. Planning agency allocates resources 3. Fixed prices

3 key roles price plays in markets:

1. Price aggregate info 2. Prices are messages 3. Prices create incentives

Points under productive efficiency

1. The max output is obtained with given resources 2. Goods are produced at *lowest opportunity cost*

Points under allocative efficiency

1. The price consumers pay is *equal to marginal cost *of producing the good 2. Production represents *consumer preferences*

What are 3 typical characteristics of market economies

1. Voluntary self interest trade is the norm 2. Profit maximized 3. Flexible prices

Two ways to calculate economic surplus are ______ and _____.

1. marginal benefit minus marginal cost; 2. consumer surplus plus producer surplus

Diamond-Water Paradox

A paradox stating that (1) the things with the greatest value in use frequently have little or no value in exchange and (2) the things with the greatest value in exchange frequently have little or no value in use.

When market forces lead to efficient production, producers are _____, and output is produced ______.

Acting in self-interest; at the lowest possible marginal cost

Fairness-Efficiency Trade-off

Actions intended to make economic outcomes fairer can cause efficiency to decrease.

People can complete many different tasks. Each person's comparative advantage is in the task that they...

Are the lest bad at doing, relative to other tasks

The consumer surplus a buyer receives in purchasing a good is found by the area _____ the _____ curve and _____ the price paid for the good

Below; demand; above

Which of these is not an important function of an efficient market? A. the allocation of the good to the buyers who most value it, as indicated by their willingness to pay B. the allocation of sales to potential sellers who have the highest willingness to sell, as indicated by the fact that they have the lowest cost C. ensuring that every buyer who purchases the good values it less than every seller who sells it, so that all transactions are mutually beneficial D. ensuring that every buyer who doesn't buy the good values it less than every potential seller who doesn't make a sale, so that no mutually beneficial transactions fail to occur

C. ensuring that every buyer who purchases the good values it less than every seller who sells it, so that all transactions are mutually beneficial

Biggest problem with centrally planned economics:

Central planners have limited info on the true value of the ways to utilize scarce resources.

At the equilibrium quantity, marginal benefit is _____ marginal cost. Consuming _____ means that some mutually beneficial exchanges do not take place, and producing ______ means that some goods go unsold.

Equal to; less; more

comparative advantage formula

Find the opportunity cost of doing an activity

Opportunity cost of INPUTS

GAINED/ LOST

Opportunity cost of OUTPUTS

LOST/ GAINED Who can do more in less time?

To maximize surplus, keep increasing output as long as

Marginal benefits are greater than or equal to marginal cost

If Mary can bake a cake at a lower opportunity cost than Sarah can, then:

Mary has a comparative advantage in baking cakes.

If Mary can bake more cakes in one day than Sarah can bake in one day, then

Mary has an absolute advantage in baking cakes

A competitive market does what to quantity produced?

Pushes it to its efficient level

The efficient quantity prevails in a market when:

The market yields the *largest possible economic surplus*

What do higher prices signal?

Value of a good has gone up

Equity theory

Values in society determine fairness

Efficiency Theory

You can't make someone better off without making someone else worse off

If buyers purchase according to the rational rule for buyers, their consumer surplus by the last item would equal:

Zero

Efficient production occurs when:

a given level of output is produced at the lowest possible cost.

In a market graph, consumer surplus is the area:

above the price and below the demand curve

Producer surplus is shown graphically as the area

above the supply curve and below the market price

People gain consumer surplus when they purchase an item

at a *price below* the value of the *benefit* they receive from the item.

In a voluntary economic transaction between a buyer and a seller, _____ can earn economic surplus from the transaction.

both the buyer and the seller

The market solves the information problem when allocating resources by:

collapsing all the relevant information about uses of the good *into its price.*

Efficient allocation of output requires that

each unit of output will go to the person who will get the *highest marginal benefit from it.*

Positive statement

how the world currently is

Normative statement

how the world ought to be

For suppliers to sell more than the equilibrium quantity, it would mean that:

it costs suppliers more to produce the good than its value to buyers.

Consumer surplus equals:

marginal benefit minus price

Markets distribute production across companies in a way that:

minimizes costs

The producer surplus on a unit sold equals:

price minus marginal cost

When producers produce more than the equilibrium quantity

resources are wasted producing goods at a higher cost than consumers are willing to pay.

absolute advantage

the ability to produce a good *using fewer inputs* than another producer

comparative advantage

the ability to produce a good at a *lower opportunity cost* than another producer

Producer surplus is the difference between

the market price and the minimum price a seller is willing to accept

Consumer surplus is equal to the difference between

the maximum price a buyer is willing to pay and the market price

Consumer surplus is shown graphically as the area

under the demand curve and above the market price