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study guide exam 2

study guide exam 2 - Free Market o Economic efficiency is...

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Free Market o Economic efficiency is the allocating, or distributing , resources to their best use Produce with the least waste possible (production efficiency) Goods and services we produce get to consumers who value them the most (consumption efficiency) o The free market system allows consumers and producer to make their own consumption and production decisions without any government interference In order for this system to guarantee us the most economically efficient outcome, we must assume we have ideal market conditions Assume consumers and producers have perfect access to information about the products they are buying and selling, there are no external effects when we consume and produce, and there is perfect competition among firms in the market o If any of these aren’t true= market failure Exists whenever the free market system fails to give us the most efficient outcome o Consumption Efficiency Consumers reservation price: highest price a consumer is willing to pay for an unit of a particular good or service Found from the demand curve Every potential buyer has a different reservation price bc they place a different value on gasoline Resources allocated most efficiently then we want scarce resource to go to those who high value the use of unit [ration] Left of the equilibrium quantity Rationing device = Market price Free market system generates equilibrium price to make sure product gets allocated to those consumers placing highest value on its use Consumer surplus The measure of how much economic surplus a consumer has earned after making his/her purchase decision
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Difference between the maximum the consumer was willing to pay for gasoline and the amount they actually paid [reservation price-price paid] Negative consumer surplus is earned by consumers to the right of equilibrium quantity Since each consumer is member of society, then each consumer surplus earned is a benefit to society Area under the demand curve and above the price paid o Production Efficiency Seller’s reservation price: the lowest price a seller is willing to accept for the production and sale of an unit of a good/service Producer surplus The difference between the price received {market equilibrium} and the seller’s reservation price {marginal cost) [price received-reservation price] Area above the supply curve and below the price received o Economic Efficiency Total value to society; addition of consumer and producer surplus Outcome that gives society the greatest economic surplus is the economically efficient outcome One that also gives us best allocation of resources Must be smaller if we produce and consumer more than equilibrium amount (vice versa) The greater the consumption and production amount past the market equilibrium quantity, the more we reduce economic surplus Market equilibrium outcome that arises due to the self-serving uncoordinated
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study guide exam 2 - Free Market o Economic efficiency is...

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