econ 101 - midterm 2 review

8/3/2019 Econ 101 - Midterm 2 Review

http://slidepdf.com/reader/full/econ-101-midterm-2-review 1/6

Lecture 5

• Welfare economics is the study of how the allocation of resources

affects economic well-being.

• Market price

• When a market price allocates scarce resources, the people who

are willing and able to buy a resource get the resource.

• Command

• A command system allocates the resources by the order of

someone in authority.

• Works well in organizations with clear lines of authority.

• Does not work well at allocating resources in the entire economy.

• Majority rule

• Resources are allocate in accord with majority vote.

• Works well when the allocation decisions being made affect a

large number of people.

• Self-interest leads to bad decisions.

• Contest

• Resources are allocated to the winner.

• First-come, first-serve

• Lottery

• Personal characteristics

• Resources are allocated to people with the “right”

characteristics.

• Force

• Resources are allocated to those who can forcibly take the

resources.



• Marginal benefit is the maximum price that people are willing and able

to pay for another unit of a good or service.

• Hence, the demand curve for a good or service is also its

marginal benefit curve.

• The market demand curve is the marginal social benefit (MSB) curve.

• A consumer surplus is the value (or marginal benefit) of a good

minus the price paid for it, summed over the quantity bought.

• Marginal cost is the minimum price that producers must receive to

induce them to produce another unit of a good or service.

• Hence, the supply curve for a good or service is also its

marginal curve.

• The market supply curve is the economy’s marginal social cost (MSC)

curve.

• Producer surplus is the price of a good minus its minimum supply-price

(or the marginal cost), summed over the quantity sold.

• Efficiency of competitive equilibrium

• The marginal benefit to the entire society is the marginal social

benefit curve.

• If all the benefits from a good go to its consumers (who is

willing and able to consume it) The demand curve is the

same as the MSB curve.



• The marginal cost to the entire society is the marginal social cost

curve, MSC.

• If all costs of producing a good are paid by the producers

(who is planning to sell the good) the market supply

curve is the same as MSC curve.

• Efficiency happens when:

• MSB of the last unit produced = MSC

• MSB intersects MSC at equilibrium point.

• Total surplus is maximized

• Deadweight loss is:

• Social loss

• Decreases total surplus that results from an inefficient level of

production.

• Obstacles to efficiency:

• Externalities

• An externality is a cost of a benefit that affects someone

other than the seller or buyer.

• Public goods and common resources:

• A public good is a good or service that is consumed

simultaneously by everyone even if they don’t pay for it

a free-rider problem in which people do not pay for their

share of goods.

• A common resource is owned by no one but available to be

used by everyone.

• Are generally over-used because no on owns the

resource.

• Monopoly

• A monopoly is a firm that has sole control of a market.



• To maximize its profit, a monopoly produces less than the

efficient quantity inefficient.

• High transaction costs

•

The opportunity costs of making a trade are transactioncosts.

• High transaction costs underproduction because too few

transaction take place.

Lecture 6

• Price ceiling

▫ A legal maximum on the price at which a good can be sold.

• Price floor

▫ A legal minimum on the price at which a good can be sold.

• Price ceiling

▫ A price ceiling is set above the equilibrium market forces

naturally move the economy to the equilibrium, and the price

ceiling has no effect.

▫ A price ceiling is set below the equilibrium

• The forces of supply and demand cannot move the price

toward equilibrium.

• A shortage in quantity.

• A “black” market

• A black market:

▫ A rent ceiling also encourages illegal trading in a black market in

which the equilibrium price is higher than the rent ceiling price.

▫ The level of black market rent depends on how tightly the rent

ceiling is enforced.



• When the rent ceiling is strictly enforced, black market will

be closer to the maximum that consumers are willing to

pay.

• A tax on sellers:

▫ Imposing a tax on sellers decreases supply

▫ S curve shifts leftward.

• tax on buyers:

▫ Imposing a tax on buyers decreases demand because the tax

lowers the amount they are willing to pay to the sellers.

▫ D curve shifts leftward.

• With perfectly inelastic demand , buyers pay the entire tax.

• With perfectly elastic demand, sellers pay the entire tax.

• The less elastic of demand, the larger the tax burden paid by the

buyers (and the smaller tax burden paid by the sellers).

• The more elastic of demand, the smaller the tax burden paid by the

buyers (and the larger tax burden paid by the sellers)

• With perfectly inelastic supply , sellers pay the entire tax.

• With perfectly elastic supply, buyers pay the entire tax.

• The less elastic of supply, the larger the tax burden paid by the sellers

(and the smaller tax burden paid by the buyers).

• The more elastic of supply, the smaller the tax burden paid by the

sellers (and the larger tax burden paid by the buyers)

Production Quotas

• Is an upper limit to the quantity of a good that may be produced in aspecific period of time.

• Production quotas will only have an impact if they are set below the

equilibrium level of output in a market



Production Subsidies

• Is a payment made by government to a producer

• Increases supply

Lecture 8

econ 101 - midterm 2 review

Documents