Ch. 7 Perfect Competition and the Invisible Hand

Invisible hand

-directs consumers and producers to pursue their own self-interest and maximize their surplus -leads to the highest level of social welfare -efficiently allocates goods and services to buyers and sellers -leads to efficient production within an industry -efficiently allocates resources across industries

Two solutions: Market economy & command economy

-market economy: prices direct flow of resources, provide incentives for participants -command economy: central agency directs resources, provides incentives

Are all efficient outcomes also equitable?

There is really no definitive answer to this question since issues surrounding efficiency and equity are the domain of normative​ economics, where subjective value judgments are made.

Bilateral negotiation

a market mechanism in which a single seller and a single buyer privately negotiate with bids and asks

Double oral auction

a market where sellers orally state asks and buyers orally state offers

Equity

addresses the issue of a "fair" distribution of resources across society (economic pie)

When economies open up to free​ trade, trading partners _______ benefit

always

Coordination problem

bringing together self-interested economic agents to form markets; when the interests of economic agents coincide

After the tariff is imposed, social surplus is equal to:

consumer surplus + producer​ surplus, + the government revenue from the​ tariff

Incentive problem

how to motivate agents to participate in markets; when the optimizing actions of two economic agents are not aligned

All else being equal, the steeper the demand curve, the ______ the social surplus in a market.

larger

______ direct the invisible hand

prices

All else being equal, the flatter the supply curve, the ______ the social surplus in a market.

smaller

Gross domestic product

the market value of final goods and services produced in a country in a given period of time

Reservation value

the price at which a trading partner is indifferent between making the trade and not doing so; willingness-to-pay value

Deadweight loss

the reduction in social surplus resulting from a market intervention (price controls)

Social surplus

the sum of consumer and producer surplus

Pareto efficiency

when no one can be made better off without making someone else worse off