Chapter 14

With free entry: A. the long run market supply curve is horizontal at the market price. B. the long run market supply curve is vertical at the market price. C. the short and long run market supply curves are the same. D. there is a known and limited number of potential suppliers that can produce a good in the long run

the long run market supply curve is horizontal at the market price.

Market demand curve

horizontal sum of the individual demand curves

The market demand function for ice cream is Qd = 10 - 2P and the market supply function for ice cream is Qs = 4P - 2, where both quantities are measured in millions of gallons per year. What is the aggregate surplus at the competitive market equilibrium? A. $4.5 million B. $9 million C. $13.5 million D. $27 million

$13.5 million

Characteristics of a perfectly competitive market include: A. the absence of transaction costs B. product homogeneity C. many sellers, each with a very small market share D. All of these are characteristics of a perfectly competitive market.

All of these are characteristics of a perfectly competitive market.

Properties of long-run competitive equilibrium with free entry include: A. an equilibrium price equal to the minimum AC. B. firms earning zero profits. C. active firms producing at their efficient scales of production. D. All of these are properties of long-run competitive equilibrium.

All of these are properties of long-run competitive equilibrium.

Aggregate surplus

Captures the net benefit created by the production and consumption of a good. Aggregate surplus= Total benfit from consumption (total willingness to pay) - total avoidable cost of production

Aggregate surplus

Consumer surplus + producer surplus

Consumer surplus

Sum of consumers' total willingness to pay minus their total expenditure

Deadweight loss

a reduction in aggregate surplus below its maximum possible value

Using market demand as a measure of willingness to pay

Whenever the units o fa good are consumed by those individuals with the highest willingness to pay for them, we can measure consumers' total willingness to pay for the units they consume by the area under the market demand curve up to that quantity.

Using supply curves to measure total avoidable cost

Whenever the units of a good are produced by the firms with the lowest avoidable cost of producing them, we can measure firms' total avoidable cost for the units they produce by the area under the market supply curve up to that quantity.

Pareto efficient

an economic outcome at which it is impossible to make anyone better off without making someone else worse off.Any change in who consumes the good, which firms produce it, or the amount that is produced and consumed, must lower aggregate surplus, making someone worse off in the process

With free entry: A. there is a known and limited number of potential suppliers that can produce a good in the long run. B. there is an unlimited number of firms that can produce a good in the long run. C. the long run market supply curve is vertical at the market quantity. D. the long run market demand curve is horizontal at the market price.

there is an unlimited number of firms that can produce a good in the long run.

The market demand function for ice cream is Qd = 10 - 2P and the market supply function for ice cream is Qs = 4P - 2, where both quantities are measured in millions of gallons per year. What is the producer surplus at the competitive market equilibrium? A. $1.5 million B. $4.5 million C. $9 million D. $13.5 million

$4.5 million

The market demand function for ice cream is Qd = 10 - 2P and the market supply function for ice cream is Qs = 4P - 2, where both quantities are measured in millions of gallons per year. What is the consumer surplus at the competitive market equilibrium? A.$4.5 million B. $9 million C. $13.5 million D. $18 million

$9 million

Long Run Competitive equilibrium with free entry

- Equilibrium price equals ACmin - Firms earn zero profit(Why they are till in the market?) - Each active firm produces at its efficient scale of production

Perfectly competitive market

1. Buyers and sellers face no transaction costs 2. Products are homogeneous, identical in the eyes of the consumer: for example wheat, counter-example: Ford and Toyotas 3. There are many buyers and sellers, each accounting for a small fraction of the overall demand or supply of the good 4. In a perfectly competitive market, buyers and sellers are price takers, taking the market price as given (unaffected by their actions) in deciding how much to buy or sell Be care!!! Few Markets are Perfectly Competitive!!! Just a benchmark for analyze other market structures

Market supply curve

Horizontal sum of the individual supply curves Short run supply: add up the shot run supply curves of all currently active firms (# of firms fixed). MC curve is above AVC Long run supply: add up long run supply curves of all potential suppliers (the number of firm can be infinite). MC curve above TAC

Market demand

Sum of the demands of all the individual consumers

Graphically, market demand for a product: A. is the horizontal difference of the individual demand curves. B. is the horizontal sum of the individual demand curves. C. is the vertical difference of the individual demand curves. D. is the vertical sum of the individual demand curves.

is the horizontal sum of the individual demand curves.

The short and long run market supply curves: A. are equivalent. B. may differ because the set of firms that are able to produce in a market may change. C. may differ due to barriers to entry in the long run. D. do not intersect.

may differ because the set of firms that are able to produce in a market may change.

Producer surplus

sum of forms' revenue minus their avoidable costs

Market supply

sum of the supply of all the individual sellers

Free entry

when technology is freely available to anyone who wishes to start a firm, and entry is unrestricted. In that case, the number of potential firms unlimited.

The market supply curve for a product: A. is the supply of an individual consumer. B. will lie to the right of all of the individual supply curves for a product. C. graphically is the vertical sum of the individual supply curves. D. will lie above all of the individual supply curves for a product.

will lie to the right of all of the individual supply curves for a product.