Microecon

Productive efficiency is achieved when

- competition among firms forces them to produce goods and services at the lowest cost

3 important economic ideas

1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin

When the government imposes price floors or price​ ceilings, three important results​ occur:

1. Some people win. 2. Some people lose. 3. There is a loss of economic efficiency.

price taker

A buyer or seller that is unable to affect the market price. Because farmer Smith is a price​ taker, he can sell as many baskets of apples as he chooses at the market price—buT he​ can't sell any apples at all at a higher price.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

mixed economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

marginal analysis

Analysis that involves comparing marginal benefits and marginal costs.

Perfect competition

In perfectly competitive​ markets, firms are price takers—they accept the market price as​ given, but not fixed. That​ is, events in the market​ (a change in demand or a change in​ supply) might change market​ price, but the individual buyer or seller is unable to affect the market price.

What does market economy rely on

Market economies rely primarily on privately owned firms to produce goods and services and to decide how to produce them

example of centrally planned economy

North Korea, and Soviet Union

Which of the following is an expression of profit for a perfectly competitive​ firm?

Profit=(P−ATC)×Q​,where P is ​price, Q is​output, and ATC is average total cost.

shut down in the short run

Shut-down point in the short​ run: In the short​ run, if price is greater than average variable cost​, then the firm should continue to produce​ (because the firm would lose an amount less than fixed costs by shutting​ down).

opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Trade offs

The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.

Economics

The study of the choices people make to attain their goals, given their scarce resources.

MC on a firm graph

This equals the supply curve

example of market economy

United States, Canada, Japan, South Korea, Singapore, Germany, France, Great Britain, and other parts of Western Europe.

What is a price taker?

a buyer or seller that is unable to affect the market price

market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

voluntary exchange

a situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction

centrally planed economy

an economy in which the government decides how economic resources will be allocated

Which price is associated with the firm producing in the short run, but exiting the industry in the long run?

b​P, start subscript, b, end subscript is less than ATC which means the firm's profits are negative, so it will exit the industry in the long run. It is still willing to produce in the short run because P_bPb​P, start subscript, b, end subscript is greater than AVC, so the firm is able to cover some of its fixed costs. under ATC, which means they can cover their fixed costs in the short run.

Suppose the market for cotton is perfectly competitive and that input prices decrease as the industry expands. Characterize the​ industry's long-run supply curve.The cotton​ industry's long-run supply curve will be

downward sloping because the​ long-run average cost of production will be decreasing.

allocative efficiency is achieved when

firms produce the goods and services that consumers value most.

P < AVC (short run)

firms shut down in the short run

market economy

in which the decisions of households and firms as they interact in markets determine the allocation of economic resources.

What are the three conditions for a market to be perfectly competitive?

must have many buyers and sellers, firms must be producing identical products, and there must be no barriers to new firms entering the market

What determines entry and exit of firms in a perfectly competitive industry in the long​ run? In a perfectly competitive industry in the long​ run,

new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.

productive efficiency

occurs when a good or service is produced at the lowest possible cost.

allocative efficiency

occurs when production is in accordance with consumer preferences.

Does the market system result in allocative​ efficiency? In the long​ run, perfect competition

results in allocative efficiency because firms produce where price equals marginal cost.

economic models

simplified versions of reality used to analyze real-world economic situations

economic variable

something measureable that can have different values, such as the incomes of doctors

Equity

the fair distribution of economic benefits