Shared Flashcard Set

Details

P&R Chap 16
General Equilibrium and Economic Efficiency
45
Accounting
Pre-School
11/07/2013

Additional Accounting Flashcards

 


 

Cards

Term
partial equilibrium analysis
Definition
Determination of equilibrium prices and quantities in a market independent of effects from other markets.
Term
general equilibrium analysis
Definition
Simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account.
Term
When markets are interdependent...
Definition
the prices of all products must be simultaneously determined.
Term
To find the general equilibrium prices (and quantities) in practice...
Definition
we must simultaneously find two prices that equate quantity demanded and quantity supplied in all related markets.
Term
If the goods in question are complements...
Definition
a partial equilibrium analysis will overstate the impact of a tax.
Term
exchange economy
Definition
Market in which two or more consumers trade two goods among themselves.
Term
efficient (or Pareto efficient) allocation
Definition
Simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account.
Term
Edgeworth box
Definition
Diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes.
Term
an edgeworth box illustrates...
Definition
...the possibilities for both consumers to increase their satisfaction by trading goods.
Term
contract curve
Definition
curve showing efficient allocations of goods between two consumers, or of two inputs between two production functions.
Term
The contract curve contains...
Definition
... all allocations for which consumers’ indifference curves are tangent.
Term
Every point on the curve is efficient because...
Definition
... one person cannot be made better off without making the other person worse off.
Term
In a competitive market the prices of the two goods determine...
Definition
... the terms of exchange among consumers.
Term
excess demand
Definition
When the quantity demanded of a good exceeds the quantity supplied.
Term
excess supply
Definition
When the quantity supplied of a good exceeds the quantity demanded.
Term
The utility possibilities frontier shows...
Definition
the levels of satisfaction that each of two people achieve when they have traded to an efficient outcome on the contract curve.
Term
welfare economics
Definition
Normative evaluation of markets and economic policy
Term
If everyone trades in the competitive marketplace...
Definition
all mutually beneficial trades will be completed and the resulting equilibrium allocation of resources will be economically efficient.
Term
Because the indifference curves are tangent in competitive equilibrium...
Definition
all marginal rates of substitution between consumers are equal.
Term
Because each indifference curve is tangent to the price line...
Definition
each person’s MRS of clothing for food is equal to the ratio of the prices of the two goods.
Term
utility possibilities frontier
Definition
Curve showing all efficient allocations of resources measured in terms of the utility levels of two individuals.
Term
social welfare function
Definition
Measure describing the well-being of society as a whole in terms of the utilities of individual members.
Term
four views of equity
Definition
1. egalitarian -- all members receive equal amounts of goods
2. rawlsian -- maximize the utility of the least-well-off person
3. utilitarian -- maximize the total utility of all members of society
4. market-oriented -- the market outcome is the most equitable
Term
technical efficiency
Definition
Condition under which firms combine inputs to produce a given output as inexpensively as possible.
Term
production possibilities frontier
Definition
Curve showing the combinations of two goods that can be produced with fixed quantities of inputs.
Term
The production possibilities frontier is concave because...
Definition
... its slope (the marginal rate of transformation) increases as the level of production of food increases.
Term
marginal rate of transformation
Definition
Amount of one good that must be given up to produce one additional unit of a second good.
Term
An economy produces output efficiently only if, for each consumer...
Definition
MRS = MRT
Term
Output Efficiency
Definition
The efficient combination of outputs is produced when the marginal rate of transformation between the two goods (which measures the cost of producing one good relative to the other) is equal to the consumer’s marginal rate of substitution (which measures the marginal benefit of consuming one good relative to the other).
Term
When output markets are perfectly competitive, all consumers allocate their budgets so that...
Definition
...their marginal rates of substitution between two goods are equal to the price ratio.
Term
each profit-maximizing firm will produce its output up to the point at which...
Definition
...price is equal to marginal cost.
Term
the marginal rate of transformation is equal to...
Definition
the ratio of the marginal costs of production,
Term
In a competitive output market, people consume to the point where...
Definition
their marginal rate of substitution is equal to the price ratio.
Term
Producers choose outputs so that
Definition
the marginal rate of transformation is equal to the price ratio.
Term
Because the MRS equals the MRT...
Definition
the competitive output market is efficient.
Term
Any other price ratio will lead to ...
Definition
an excess demand for one good and an excess supply of the other.
Term
comparative advantage
Definition
Situation in which Country 1 has an advantage over Country 2 in producing a good because the cost of producing the good in 1, relative to the cost of producing other goods in 1, is lower than the cost of producing the good in 2, relative to the cost of producing other goods in 2.
Term
absolute advantage
Definition
Situation in which Country 1 has an advantage over Country 2 in producing a good because the cost of producing the good in 1 is lower than the cost of producing it in 2.
Term
What Happens when Nations Trade
Definition
The comparative advantage of each country determines what happens when they trade.
The outcome will depend on the price of each good relative to the other when trade occurs.
Term
the gain from free trade
Definition
An Expanded Production Possibilities Frontier
Term
WHY MARKETS FAIL
Definition
Market Power
Incomplete Information
Externalities
Public Goods
Term
Market Power
Definition
Suppose that unions gave workers market power over the supply of their labor in the production of food.
Too little labor would then be supplied to the food industry at too high a wage and too much labor to the clothing industry at too low a wage.
In the clothing industry, the input efficiency conditions would be satisfied. In the food industry, the wage paid would be greater than the wage paid in the clothing industry.
The result is input inefficiency because efficiency requires that the marginal rates of technical substitution be equal in the production of all goods.
Term
Incomplete Information
Definition
If consumers do not have accurate information about market prices or product quality, the market system will not operate efficiently.
This lack of information may give producers an incentive to supply too much of some products and too little of others.
In other cases, while some consumers may not buy a product even though they would benefit from doing so, others buy products that leave them worse off.
Term
Externalities
Definition
Sometimes, however, market prices do not reflect the activities of either producers or consumers.
There is an externality when a consumption or production activity has an indirect effect on other consumption or production activities that is not reflected directly in market prices.
Term
public good
Definition
Nonexclusive, nonrival good that can be made available cheaply but which, once available, is difficult to prevent others from consuming.
Supporting users have an ad free experience!