ECON202: Principles of Microeconomics - Perfect Competition and the Invisible Hand

Flashcards covering key vocabulary from Lecture 7: Perfect Competition and the Invisible Hand in Microeconomics, including concepts like Adam Smith, the invisible hand, market efficiency, surpluses, resource allocation, and market failures.

Adam Smith

The father of economics, who conjectured that self-interest was a necessary ingredient for an economy to function efficiently and proposed the concept of the 'invisible hand'.

Invisible Hand

A concept proposed by Adam Smith, stating that when all assumptions of a perfectly competitive market are in place, the pursuit of individual self-interest promotes the well-being of society as a whole.

Perfectly Competitive Market

A market environment where buyers and sellers are price-takers, leading to efficient outcomes and maximization of social surplus.

Reservation Value (Buyers)

The maximum price a buyer is willing to pay for a good or service.

Reservation Value (Sellers)

The minimum price a seller is willing to accept for a good or service (often equivalent to marginal cost).

Consumer Surplus

The difference between the maximum price consumers are willing to pay and the actual price they pay. (P{max} - P{actual})

Producer Surplus

The difference between the actual price producers receive and the minimum price they are willing to accept. (P{actual} - P{min})

Social Surplus

The sum of consumer surplus and producer surplus, representing the total benefit to society from economic activity.

Pareto Efficiency

A state where no one can be made better off without making someone else worse off; competitive markets are Pareto efficient.

Efficient Production Allocation

The outcome where firms in a competitive market produce at the least cost, directed by the invisible hand to set production where P = MR = MC for each plant.

Economic Profit (P > ATC)

A situation where a firm's total revenue exceeds its total economic costs (including opportunity costs), indicating an incentive for new firms to enter the industry.

Economic Loss (P < ATC)

A situation where a firm's total revenue is less than its total economic costs, indicating an incentive for existing firms to exit the industry.

Breakeven (P = ATC)

A situation where a firm's total revenue equals its total economic costs, resulting in zero economic profit.

Resource Reallocation

The process by which free entry and exit of firms in response to economic profits or losses directs resources to their highest valued uses across industries.

Price Controls

Government interventions that restrict the ability of prices to fluctuate, thereby acting to restrict market efficiency and potentially creating shortages or surpluses.

Deadweight Loss

The reduction in social surplus resulting from a market intervention, such as price controls, that prevents the market from reaching its efficient equilibrium.

Coordination Problem

The challenge of bringing together self-interested economic agents to form markets.

Incentive Problem

The challenge of motivating economic agents to participate in markets.

Market Economy

An economic system where prices direct the flow of resources and provide incentives for participants, solving coordination and incentive problems.

Command Economy

An economic system where a central agency directs resources and provides incentives, an alternative solution to coordination and incentive problems.

Efficiency (Economics)

A positive economic position that describes how resources are allocated to maximize output or social surplus.

Equity

A normative economic position that addresses the issue of a 'fair' distribution of resources across society, often a goal for government intervention.