Econ II - Characteristics of Competitive market Equilibrium

What is the main feature of competitive markets?

They tend to gravitate toward the equilibrium quantity and price

Why is market equilibrium important?

It is an effective method of allocating resources

What information does the equilibrium price convey to suppliers?

The value consumers place on a good

What information does the equilibrium price convey to buyers?

The opportunity cost of supplying the good

How does competitive market equilibrium allocate goods efficiently?

It gives goods to buyers who value them most and are supplied by lowest-cost producers

What is the effect of competitive market equilibrium on buyer and seller benefits?

It maximizes the benefits buyers and sellers receive from exchange

What does the height of the demand curve at a point indicate?

The marginal buyer’s willingness to pay

Who is the marginal buyer?

The buyer who is just indifferent between buying or not buying the good at a given price

In the Springsteen concert example, how much would Barb benefit if the ticket price is $60?

$40, because she values it at $100

How much would Bob benefit from the $60 ticket?

$20, because he values it at $80

How much would Sharon benefit from the $60 ticket?

$10, because she values it at $70

What is consumer surplus?

The total benefit buyers receive above the market price

How is total consumer surplus measured?

By the area below the demand curve and above the market price

What does the height of the supply curve at each quantity show?

The opportunity cost or willingness to supply of the marginal seller

What is producer surplus?

The difference between the market price and the opportunity cost for suppliers

How is total producer surplus measured?

By the area above the supply curve and below the market price

What is total surplus?

The sum of consumer surplus and producer surplus

Why is maximizing total surplus desirable?

It produces the greatest overall good for society

How does competitive market equilibrium relate to Pareto efficiency?

It satisfies Pareto efficiency; no one can be made better off without making someone else worse off

What happens if the quantity exchanged is less than equilibrium (Q1)?

The value to buyers exceeds cost to sellers; increasing quantity would benefit both

What happens if the quantity exchanged is more than equilibrium (Q2)?

The cost to producers exceeds value to consumers; welfare would decrease

Why doesn’t a planner need to know each consumer’s value in a competitive market?

The market price signals guide self-interested buyers and sellers to achieve efficiency

What is the benefit of competitive markets over manual allocation by a planner?

It achieves efficient outcomes automatically without needing detailed knowledge of values and costs