AP Micro - Chapter 6 (6.2-6.4)

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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)


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