ECON Chapter 7
Double oral auction
Both bids and asks are orally stated
Total cost of production
Can be computed by multiplying ATC x Q
Equity
Concerned with the distribution of resources across society. How the pie is distributed across agents.
Consumer surplus
Difference between buyers' reservation values (WT() and what the buyers actually pay
Producer surplus
Difference between the price and the sellers' reservation values (WTA or marginal cost)
Distribute production
Equalize marginal costs across all plants
Invisible hand
Forceful idea in economics that suggests that when all of the assumptions of a perfectly competitive market are in place, the pursuit of individual self-interest promotes the well-being of society as a whole
Allocation of goods in free markets
Goods are rationed with prices. This is efficient because those who are willing to pay the most receive the good
Incentive problem
How to align the interests of the agents. When the optimizing actions of two economic agents are not aligned, this arises
Coordination problem
How to bring agents together to trade. When interests of economic agents coincide, this arises
Result of shifting of resources
In a perfectly competitive market equilibrium, production occurs at the minimum of the ATC
Prices
Incentive behind invisible hand
Allocation of goods with price control
Market no longer operates efficiently. Long lines of people wait to purchase water, and the water does not always go to those who value it most
Maximize profit
Produce until MC = MR
Deadweight loss
The decrease in social surplus from a market distortion
Adam Smith
The father of economics. Conjectured that self-interest was a necessary ingredient for an economy to function efficiently
Maximizing social surplus
The highest-value buyers are making a purchase and the lowest-cost sellers are selling
GDP (Gross domestic product)
The market value of final goods and services produced in a country in a given period of time
Reservation values
The price at which a trading partner is indifferent between making the trade and not doing so (WTP for buyers, WTA for sellers)
Ask prices
The prices that sellers submit
Bid prices
The prices that the buyers submit
Social surplus
The sum of consumer surplus and producer surplus. How big the societal pie is.
Features of market economy
These are remarkable at providing price signals that guide resources in a way that maximizes social surplus and makes the economy efficient
Pareto efficiency
When no individual can be made better off without making someone else worse off
Industry equilibirum
Where P=ATC=MC
Three effects of price controls
1. Lower social surplus, because the number of trades decreases 2. Redistribute surplus from one side of the market to the other (ceiling ->to consumers/floor ->to producers) 3. For people who benefit, there is a reallocation of surplus, which occurs through non-price mechanisms
Command economy
A centralized authority determines the goods and services produced
Price control
A government restriction on the price of a good or service
Bilateral negotiation
A market mechanism in which a single seller and a single buyer privately negotiate with bids and asks
Market economy
Based upon price signals and strong economic incentives
