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P&R Chap 9 - Analysis of Competitive Markets
Analysis of Competitive Markets
42
Accounting
Pre-School
10/10/2013

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Term
welfare effects
Definition
gains and losses to consumers and products
Term
deadweight loss
Definition
net loss of total (consumer + producer) surplus
Term
economic efficiency
Definition
maximization of aggregate consumer and producer surplus
Term
market failure
Definition
situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers

- usually occurs to due to:
1. externalities
2. lack of information
Term
externality
Definition
action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price
Term
import quota
Definition
limit on the quantity of a good that can be imported
Term
tariff
Definition
tax on an imported good
Term
specific tax
Definition
tax of a certain amount of money per unit sold
Term
subsidy
Definition
payment reducing the buyer's price below the seller's price (i.e. a negative tax)

- benefit of subsidy split between buyers and sellers (opposite of tax)
Term
how consumer and producer surplus used...
Definition
to evaluate the gains and losses to consumers and producers of government policies.
Term
when gov imposes a tax or subsidy...
Definition
- price usually does not rise or fall by the full amount of the tax or subsidy.

- the incidence of tax or subsidy is usually split between producers and consumers.

- fraction that each ends up paying or receiving depends on relative elasticities of supply and demand.
Term
key determinant of who absorbs costs of a tax or subsidy
Definition
relative elasticities of supply and demand
Term
why does government intervention usually leads to a dead-weight loss (DWL)?
Definition
even if consumer surplus and producer surplus are weighted equally, there will be a net loss from government policies that shifts surplus from one group to the other.

-- in some cases, DWL will be small...
-- but others -- price supports and imports quotas -- large
Term
Consumer Surplus
Definition
The difference between the highest price a consumer is willing to pay for a good or a service and the price the consumer actually pays.

*If consumer surplus is/would be negative, then the consumer does no make the purchase.

i.e. Consumer A would pay $10 for a good whose market price is $5 and therefore enjoys a benefit of $5
Term
Producer Surplus
Definition
Producer Surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually recieves.



Marginal Cost is the additional cost to a firm of producing one more unit of a good or service. MC increases as more units are produced. Since MC increases with production, the price at which firms are willing to sell will also increase with production
Term
Economic Surplus
Definition
Economic Surplus is the sum of consumer surplus and producer surplus.

ES= CS + PS

How different than tsw?
Term
Economic Efficiency
Definition
total social welfare?

Economic Efficiency is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and economic surplus is maximized. Economic efficiency happens at equilibrium. This means that the market equilibrium is economically efficient.
Term
Deadweight Loss
Definition
Deadweight Loss
Term
assumptions for competitive markets analysis:
Definition
1. free entry and exit (π of a perfectly competitive firm = 0
2. no externalities
3. perfect info
4. homogeneity
5 private goods
Term
pareto superior
Definition
if improve conditions for someone without harming anyone (almost never)
Term
pareto efficiency
Definition
no pareto superior points -- we cannot make anyone better off without harm

e.g. (taxes)
Term
why difficult to measure surpluses?
Definition
we usually don't know what people *would* pay
Term
total social welfare
Definition
consumer surplus + producer surplus

i.e. -- together the measure the welfare benefit of a competitive market
Term
producer surplus
Definition
measures the total profits of producers, plus rents to factor inputs

*the benefit that lower-cost producers enjoy by selling at the market price.
Term
A market is inefficient if...
Definition
more consumer surplus and producer surplus could be obtained.
Term
think about producer surplus
Definition
i dont quite get it.
Term
price control
Definition
The price of a good has been regulated to be no higher than Pmax, which is below the market-clearing price Po.
Term
effect of price control
Definition
- causes shortages, since produces make less.
- TSW falls, even though a new "rectangle" is moved to consumer surplus, since some people wont get product at all.
- creates incentive for black markets.
Term
effect of price controls when demand is inelastic
Definition
consumers may suffer a net loss (if "triangle" gained is smaller than "triangle lost")

- picking one subset of consumers over another
Term
if price is held above market-clearing level
Definition
producers will produce more than is needed (since some consumers will not be able to buy -- a shift along demand curve), increasing DWL

- producers could be worse off if triangles disappear
Term
minimum wage
Definition
drop in employment

- incentives black market labor, or reduced hours
Term
price support
Definition
price set by government above free-market level and maintained by government purchases of excess supply
Term
effects of price supports
Definition
producers gain, consumers lose

forces people to, say, keep farming peanuts while gov destroys peanuts (cash subsidies are better... allow farmers to change crops. or subsidize land..)

cost to government: Ps(Q2 - Q1)

total change in TSW: ∆CS + ∆PS - Cost to Gov
Term
supply restriction
Definition
to maintain price above market-clearing level, gov can restrict supply either by imposing production quotas (taxi medallions) or by giving producers incentive to reduce output (acreage limitations in agriculture)

- for incentive to work, must be at least as large as the additional planting, given the higher price Ps.

- there is a cost to government
Term
import tariff or quota
Definition
- consumers usually lose quite a bit... especially if so high that nothing is imported

- graph is drawn with and without imports
Term
specific tax
Definition
tax of a certain amount of money per unit sold

- graph set up with price (Pb) paid by buyers and price (Ps) received by sellers.
- burden usually split by buyers and sellers (though changes with elasticities of supply and demand)

- with tax, producers supply less and and consumers buy less, resulting in deadweight loss
Term
four market-clearing conditions needing to be satisfied after tax in place
Definition
(look into these)

1. Qd = Qd(Pb)
2. Qs = Qs(Ps)
3. Qd = Qs
Pb-Ps = t
Term
impact of tax when demand elastic
Definition
people will buy substitutes, so firms will eat more of the tax cost
Term
impact of tax when demand inelastic
Definition
people cant buy substitutes and have no choice eat tax cost
Term
formulas for unregulated marked:
Definition
Pd = Ps
Term
formula for tax
Definition
Pd = Ps + tax
Term
subsidy
Definition
Pd = Ps - subsidy
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