Economists judge markets by whether they use scarce resources well. Efficiency and surplus give a way to measure that.
Allocative efficiency: resources go to the goods people value most, where price = marginal cost (P = MC). Productive efficiency: output is produced at the lowest average cost, at the minimum of the AC curve. Pareto efficiency: no one can be made better off without making someone worse off.
Consumer surplus is the gap between what consumers are willing to pay and what they actually pay. Producer surplus is the gap between the price received and the minimum price producers would accept. In a competitive market the total surplus is maximised. A deadweight loss is the surplus lost when output is restricted below the efficient level, such as with monopoly power or a tax.
Allocative efficiency occurs where:
Productive efficiency occurs at:
In a Pareto-efficient allocation:
A deadweight loss is:
A profit-maximising monopolist typically produces:
Total cost is $500 and output is 50 units.
What is the average cost, in $?
Enter an exact answer, without rounding.Market price $6, quantity 100, maximum willingness to pay $10 (linear demand).
What is consumer surplus, in $?
Enter an exact answer, without rounding.Market price $6, quantity 100, minimum supply price $2 (linear supply).
What is producer surplus, in $?
Enter an exact answer, without rounding.Total surplus equals:
A deadweight loss triangle has an area of:
Competitive markets in the long run tend to be:
Which of these can create a deadweight loss?
If price is above marginal cost, the market is:
Why is the first slice of pizza better than the fourth? And where does a dollar go after you spend it? Two big models answer these questions.
Marginal utility is the extra satisfaction from one more unit, and it usually diminishes. An indifference curve shows combinations of two goods giving equal satisfaction. The consumer’s best point is where the budget line is tangent to the highest indifference curve.
In the circular flow of income, households supply factors to firms, and firms pay incomes that return as spending. Withdrawals are saving, taxes and imports. Injections are investment, government spending and exports. At equilibrium, withdrawals = injections.
Diminishing marginal utility means that:
An indifference curve joins combinations that give:
The consumer’s best choice is where the budget line:
Which is an injection?
The marginal propensity to consume is 0.75.
What is the multiplier?
Enter an exact answer, without rounding.The multiplier is 5 and investment rises by $10 million.
By how many $ million does national income rise?
Enter an exact answer, without rounding.Income rising, with prices unchanged, makes the budget line:
Which is a withdrawal?
Indifference curves slope downward because:
If withdrawals exceed injections, national income:
The total effect of a price change splits into:
Questions from every topic in this course. Pick an answer for each one, then hit Check My Answers.
Output is restricted from 100 to 60 and the price–MC gap is $4 at 60. The deadweight loss (triangle) is:
Allocative efficiency occurs where:
Productive efficiency occurs at:
Consumer surplus is:
A negative externality in production leads to:
Deadweight loss is:
Pareto efficiency means:
A Pigouvian tax is designed to:
With MPC = 0.5, the multiplier is:
The equi-marginal rule says MU ÷ price should be: