ECO100Y5 Lecture Notes - Lecture 16: Social Cost, Perfect Competition, Externality
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Market failure: a situation in which the free market, in the absence of government intervention, fails to achieve allocative efficiency. Free market (market economy): a market based on supply and demand. Allocative efficiency: a market where the right goods are produced for the right people at the right price, and occurs when there is an optimal distribution of goods and services (s (mc) = d (mb)) Optimal distribution: when the price that consumers are willing to pay is equal to the marginal benefit that they receive. Economy of scale: a fall in average costs resulting from an increase in the scale of production. Market power: the extent to which a firm can influence the price of an item by exercising control over its demand, supply, or both. Externality: an effect on parties not directly involved in the production or use of a commodity. Ex. positive externality: education, negative externality: smoking.
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1) When positive economic profits exist in an industry:
the market price of the good produced by the industry is less than the marginal cost faced by the industry. |
the market price of the good produced by the industry is less than the average total cost of the industry. |
there is an exit of firms from the industry. |
resources flow from less productive uses to that particular industry. |
2) When price is less than the firms' minimum average total cost, ________.
firms' profits are likely to be maximum |
prices are likely to fall further |
new firms will enter the market |
existing firms will leave the market |
3) The entry of new firms into a perfectly competitive market will cause:
an increase in the profitability of existing firms. |
a decrease in the profitability of existing firms. |
a right shift of the demand curve of the good being produced by the firms. |
a left shift of the demand curve of the good being produced by the firms. |
4) Entry of new firms into an existing market causes:
a downward movement along the market supply curve. |
a leftward shift of the market supply curve. |
an upward movement along the market supply curve. |
a rightward shift of the market supply curve. |
5) The incentive for new firms to enter into a perfectly competitive market is primarily the:
high level of government intervention in the market. |
large number of buyers in the market. |
large number of existing firms in the market. |
positive profits observed for the existing firms in the market. |