Arec- Pre chapter questions Chapter 7

If the market equilibrium is efficient, then

- It is not possible to find a transaction that will make some people better off without harming others - Economic surplus is maximized, enabling society to easily achieve its goals

The market equilibrium is only efficient when

- The market supply curve captures all the relevant costs of producing another unit of the good -The market demand curve captures all of the relevant benefits of buying another unit of the good. -the market is perfectly competitive

Barriers to entry prevent free entry

- exclusive control over important inputs - economies of scale - technological superiority - Government restrictions - product compatibility and network compatibility

What does it mean when a market works well?

-No externality's - No monopoly/ market power - No public goods - No asymmetric information about the products quality

Three ways to be exceptionally rich (or happy)

-Work exceptionally hard -Have a unique skill or talent (or preference) -Be lucky

If the market for calculators is in a long run equilibrium, and the demand for calculators increases, then we would expect

-firms to earn an economists profit in the short run -The price of calculators to rise in the short run

consumer surplus equation

3x60/2

Economic profit is the difference between

A firms total revenue and the sum of its explicate and implicit costs.

invisable hand

Adam Smith idea that capitalism allows the market to adjust without any influence, because people want to make a profit -Often results in the most efficient allocation of resources

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

Barrier

Opportunity Cost of tradeable permits In many countries, power companies need permits for each ton of Co2 they emit. These permits can be sold to other companies if they are not being used. - At the beginning of a year, a government can decide to action off these permits or give them out for free. - The EU decides to give the permits out for free. -But power companies still raised their prices as if they had payed for the permits. Why?

Because how they got the permits does not matter for the opportunity cost of these permits. The opportunity cost depends on how much the companies would get if they sold permits to others.

barrier to entry examples

Can not be replaced easily

In a perfectly competitive firm with free entry and exit, what will happen?

Each firm will have zero economic profits in long run equilibrium

A firms economic loss is $10,000, then its ___ is -$10,000

Economic Profit

Is a long run market equilibrium of a perfectly competitive industry inefficient of efficient

Efficient

When the government leaves a market alone and the market works well what happens

Efficient outcome ( total surplus is maximized)

True or False? Firms in competitive environments make no accounting profits when their market is in long run equilibrium?

False

True or False? The economic maximum "there is no cash on the table" means that there are never any unexploited economic opportunity's

False

If a government interferes with a market and a market does not work well then

Government can improve the outcome (= increase in total surplus)

The opportunity cost of all the resources supplied by a firms owner are the firms what cost

Implicit costs

Which of these statements about perfectly competitive firms and equilibrium is true?

In the short run, a perfectly competitive can make negative profit; in the long run, it makes zero

If a government interferes with a market and the market works well what happens

Inefficient outcome (loss in total surplus)

If a government leaves a market alone and the market doesnt not work well what happens

Inefficient outcome (loss in total surplus)

Economic Rent

It is the portion of payment for in input that is above the suppliers reservation price for that input For inputs that cannot be replaced easily are not driven down to zero.

Dead weight loss

Loss in total economic surplus

If a firm earns a economic loss, then its economic profit is

Negative

When the market is in equilibrium, there are ____ opportunity's for gain available to individuals

No further

The long run market equilibrium of a perfectly competitive industry is efficient when?

No mutually beneficial transactions go unexploited (total surplus is maximized) (true in short and long run equilibrium) Cost per unit are maximized (only in the long run)

How to calculate normal profit

Normal cost = opportunity of resources supplied by the firms owners

Adam smiths theory of invisible hand states that the actions of independent self interested buyers and sellers will ____ result in the most efficient allocation of resources.

Often

The part of the payment for a factor of production that is greater then the owners reservation price is called economic what

Rent

What does the long run supply curve show

Shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry

A firms explicit costs include

The actual payments a firm makes to its factors of production.

The following appeared as part of the business plan of an investment and financial consultant firm. "studies suggest that an average coffee drinker's consumption of a coffee increases with age, from age 10 through age 60." -Even after age 60 coffee consumption remains high -The average cola drinkers consumption declines with increasing age -Both of these trends have remained stable for the last 40 years -Given the number of older adults will significantly increase as the population ages over the next 20 years. It follows that demand for coffee will increase and the demand for cola will decrease during this period. We should therefore consider transferring our investments from Cola Loca to Early Bird coffee What describes this situation best?

The argument is not well reasoned because if demand, prices and profits go up in the short run, higher profits will entice more firms to enter in the long run which will drive long run profits down again

How do you calculate economic profit

The difference between a firms total revenue and the sum of its explicate and implicit costs Ex. 6000,000-(500,000+100,000)= -50,00

A firms implicit costs are

The opportunity costs of the resources supplied by the firms owners

What does marginal cost look like in a perfectly competitive market in equilibrium

The value for marginal cost is the same for all firms. This is true for short and long run equilibriums

In the long run, economic profit is driven to zero, what does its barriers to entry look like

There are no barriers to entry

Economists believe that

There are other important social goals besides economic efficiency

What is not a lesson that we learned in class?

There is no difference between "economic profit" and "Accounting profit". This is false there is a difference between the two

When is there free entry and exit into and from and industry

This can happen when - the number of producers in an industry can adjust to changing market conditions and that producers in an industry can not artificially keep other firms out.

True or False? Firms that can introduce cost- saving innovations can make an economic profit in the short run?

True

A market is in short- run market equilibrium when?

When quantity supplied equals quantity demanded, taking the number of producers as given

A market is in long run equilibrium when?

When quantity supplied is equal to quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the ______ function of price.

allocative function of price

Price controls are often designed to help the poor, but the fact that they reduce total economic surplus means that alternative policies such as direct income transfers to the poor

could make everyone better off

The individual pursuit of self-interest ____ with broader interests of society

does not always coincide

In the long run, economic loss creates an incentive for

exiting firms to exit the market

If the government were to subsidies the price of cars, it's likely that the total economic surplus would

fall

What happens to mutually beneficial transactions

none of them go unexploited (total surplus is maximized) this is true in short- and long term equilibrium. Costs per unit are minimized but only in long run.

The opportunity cost of the resources supplied by a firms owner is the firm's what kind of profit

normal profit

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

positive economic profit

The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ______ function of price.

rationalizing function of price

How do you calculate accounting profit

revenue - explicit costs

In the long run, all firms in an industry will tend to earn

zero economic profit