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19 Cards in this Set
- Front
- Back
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Invisible Hand
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Adam Smith's metaphor for his theory stating that under carefully specified circumstances, the actions of independent, self-interested buyers and sellers will result in the largest possible economic surplus.
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Economic Surplus
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The benefit of an action minus its cost.
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Perfect Competition
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A market in which no individual supplier has significant influence on the market price of the product.
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Price Taker
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A firm that has no influence over the price at which it sells its product.
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Four Conditions to Produce a Perfectly Competitive Market:
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(1) All firms sell the same standardized product. (2) Market has many buyers and sellers (both are price takers) (3) Productive resources are mobile. (4) Buyers and sellers are well informed. |
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Three Good Reasons for Studying Perfect Competition |
(1) Some markets are closer to perfect competition than others. (2) It is easier to first analyze perfect competition (3) Perfect competition provides a way for common good to harmonize with self interest |
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When the firms produce only a very small part of industry output and can sell as much or as little as it wants at the prevailing market price, the demand curve facing the firm is perfectly elastic at the market price.
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Total Economic Surplus
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The sum of all the individual economic surpluses gained by buyers and sellers who participate in the market. |
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Suppliers (or sellers) Reservation Price
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The lowest price a supplier will accept in return for providing a good or service. |
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Demander's (or buyer's) Reservation Price |
The highest price a demander will offer in order to obtain a good or service. |
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Consumer Surplus
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The total economic gain of the buyers of a product, as measured by the cumulative difference between their respective reservation prices and the price they actually paid.
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Producer Surplus
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The total economic gain of the sellers of a product, as measured by the cumulative difference between the price received and their respective reservation prices.
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Price Ceiling
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Maximum allowable price, specified by law or regulation.
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Consumer Surplus = (0.5)(Y component of intercept)(Quantity) Producer Surplus = (0.5)(Y axis intercept - Y component of intercept)(Quantity) Total Economic Surplus = Consumer Surplus + Producer Surplus |
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True or False: Other things remaining equal, the less elastic supply is, the smaller is the loss of total economic surplus arising from price control and the larger is its redistributive impact.
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True.
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Price Floors
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A minimum allowable price, specified by a law or regulation. |
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Who Pays a Tax Imposed on Sellers of a Good |
For goods with perfectly elastic supply curves, the entire burden of any tax is borne by the buyer. |
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Excise Tax
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A tax charged on each unit of a good or service.
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Deadweight Loss
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The reduction in economic surplus that results from adoption of a policy.
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