ECON 2102 Chapter 7

subsidies ___ the total economic surplus

reduce

If the total economic surplus from a market is thought of as a pie to be divided among the participants in the market, then imposing price controls will:

reduce the size of the pie

allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

rationing function of price

changes in prices distribute scarce goods to those consumers who value them most highly

Suppose it's possible to f‌ind a transaction that will make some people better off without hurting others. In this case, we know the market equilibrium ____

isn't socially optimal

if all of the f‌irms in a market earn zero economic prof‌it, then we would expect:

neither entry into nor exit from the market.

When the market is in equilibrium, there are ___ opportunities for gain available to individuals.

no further

normal profit

the opportunity cost of the resources supplied by the firm's owners, equal to accounting prof‌it minus economic profit

Implicit costs

the opportunity costs of the resources supplied by the firm's owners

Tax incidence is:

the relative tax burden borne by buyers and sellers.

accounting profit

total revenue - explicit costs

economic profit (or excess profit)

total revenue - explicit costs - implicit costs

If the market equilibrium is efficient. then:

1.) economic surplus Is maximized. enabling society easily achieve its goals 2.) It's not possible to f‌ind a transaction that will make some people better off without harming others

If the market for soccer balls is in a long run equilibrium, and the demand for soccer balls fails, then we would expect:

1.) f‌irms to exit the market in the long run 2.) the price of soccer balls to fall in the short run

The market equilibrium is only eff‌icient if:

1.) the market is perfectly competitive 2.) the market demand curve captures all of the relevant benefits of buying another unit of the good 3.) the market supply curve captures all of the relevant costs of producing another unit of the good

When supply is more elastic than demand, the tax burden falls on ___. If demand is more elastic than supply, ___ will bear the cost of the tax.

> buyers > producers

The allocative function of price cannot operate unless f‌irms can ___

> enter new markets and leave existing ones at will > If new f‌irms could not enter a market in which existing f‌irms were making a large economic prof‌it. economic prof‌it would not tend to fall to zero over time, and price would not tend to gravitate toward the marginal cost of production.

If the f‌irms in a market are earning a positive economic prof‌it, then in the long run, ___ the market will lead economic prof‌it to ___.

> entry into > fall

if the f‌irms in a market are earning an economic loss, then in the long run there will be ___ the market, leading the equilibrium price to ___

> exit from > rise

invisible hand theory

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

Suppose Emily is an exceptionally talented architect. Her opportunity cost of working as an architect is $60,000 per year, and her salary at the architectural f‌irm where she works is $150,000 per year. Thus, Emily's economic rent from being an architect is:

Economic rent is the part of the payment for a factor of production that is above the owner's reservation price: $150,000-$60,000=$90,000

True or false: Economists do not believe that it's important to address poverty and inequality because all that matters is whether the market Is eff‌icient.

False

True or false: The market equilibrium is always eff‌icient.

False > The market equilibrium may not be eff‌icient if the market is not perfectly competitive or if the market supply curve and the market demand curve do not capture all of the relevant costs and benef‌its of a good.

Why is market equilibrium pareto efficient?

The answer is that it is always possible to construct an exchange that helps some without harming others whenever a market is out of equilibrium

In a market where government has set the price below the equilibrium price, one might expect

a black market to develop as individuals try to take advantage of unexploited opportunities.

A price ceiling that is set below the equilibrium price will result in:

a shortage of the good.

eff‌icient (or Pareto efficient)

a situation is eff‌icient if no change is possible that will help some people without harming others

The fact that f‌irms enter industries in response to positive economic prof‌it and leave industries in response to economic loss illustrates the:

allocative function of price.

the pursuit of individual self interest doesn't ___

always coincide with society's interest > Ex. pollution/fraud

government revenue equals

amount of tax * new equilibrium quantity

economic loss

an economic prof‌it that is less than zero

producer surplus

area of the triangle left of the equilibrium point and below the price line

Any force that prevents f‌irms from entering a new market is called a ___ to entry

barrier

The market equilibrium typically will not be socially optimal when the costs and benefits to individual participants in the market ___ those experienced by society as whole.

differ from

In general, the eff‌icacy of the invisible hand depends on ___

how well the individual costs and benefits of actions in the marketplace coincide with the costs and benefits of those actions of society

The fact that f‌irms are free to enter or leave an industry at any time ensures that ___

in the long run, all f‌irms in the industry will tend to earn zero economic profit > Their goal is not to earn zero profit. Rather, the zero-profit tendency is a consequence of the price movements associated with entry and exit.

One reason that f‌irms have a strong incentive to develop cost-saving innovations is that these innovations enable the f‌irm to earn an economic prof‌it ___

in the short run

In the long run, new f‌irms will enter a market if existing firms are earning a ___

positive economic profit

When perfectly competitive firm decides to shut down it is most likely that:

price is below the firm's average variable cost

Which ordering best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand function will shift to the right causing the market

price to increase. Increased profits will encourage new firms to enter, shifting the market supply function to the right. Long-run market equilibrium will be at a higher quantity but at the same price as before the surge in popularity.

The Equilibrium Principle (No-Cash-on-the-Table Principle)

tells us that when a market reaches equilibrium, no further opportunities for gain are available to individuals. > This principle implies that the market prices of resources that people own will eventually reflect their economic value.

economic rent

that part of the payment for a factor of production that exceeds the owner's reservation price.

explicit costs

the actual payments a f‌irm makes to its factors of production and other suppliers

loss in total economic surplus:

the difference between the producer and consumer surplus > always a positive number i think

deadweight loss

the loss in total economic surplus

In the long run. in a market in which firms are earning a positive economic profit, entry will occur until all f‌irms earn

zero economic prof‌it.

If all firms in a perfectly competitive industry are earning a normal profit, then:

there is no incentive for firms to enter or exit the industry.