ECON-2006EG Study Guide - Quiz Guide: Marginal Cost, Perfect Competition, Planned Economy

15 views7 pages

ceruleanraccoon367

7 Mar 2021

School

Laurentian

Department

Economics / Science Èconomique

Course

ECON-2006EG

Professor

Byron Eastman

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Chapter 7: perfect competition and the invisible hand. The invisible hand efficiently allocates goods and services to buyers and sellers. The invisible hand leads to efficient production within an industry. The invisible hand allocates resources efficiently across industries. There are trade-offs between making the economic pie as big as possible and dividing the pieces equally. Adam smith (the wealth of nations, 1776): self-interest was a necessary ingredient for an economy to function efficiently: perfect competition and efficiency. Reservation value: (willingness to pay values) price at which a trading partner (person) is indifferent between making the trade and not doing so. Social surplus: sum of consumer and producer surplus: represents total value from trade (buying & selling goods and services) in the market. Is maximized when buyers & sellers are optimizing in perfectly competitive markets (highest-value buyers purchase & lowest cost sellers sell) Consumer surplus: difference between the buyer"s reservation values and what the buyers actually pay.

Related Questions

Considered by many to be the founder of modern economics, Adam Smith published his masterpiece The Wealth of Nations in 1776. Smith wrote in support of market economies as feudalism in Europe was unravelling. Hence, many of his insights clashed with the ideas of his contemporaries whom continued to be drawn to less modern notions of markets as governed by duties owed, hierarchy, master and servant, and paternalism. In Smithâs view, markets are guided by the self-interests of market participants, not by obligations imposed, moral or otherwise, by religious authorities, aristocracy, and crown.

Consider the following quote taken from The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizensâ¦.Every individualâ¦neither intends to promote the public interest, nor knows how much he is promoting itâ¦.He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part in it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Now suppose that Jim enters the market to purchase a gallon of milk from a local dairy. Jill enters the market to contribute $100 to a charitable cause. Based on Smithâs analysis, which transaction is guided solely by self-interest? How could either transaction contribute to the public interest? Is one superior to the other in that the first transaction confers mutual economic gains to both parties while the other confers a gain to only a single party? Are two gains superior to one? Briefly discuss.

Rules: Limit your thoughts to no more than two pages total, using Microsoft Word, 12 point type in Times New Roman font. Double spaced with one inch margins throughout. Do not worry about being right or wrong, the purpose of this exercise is for you to stretch your mind and to think critically

ECON-2006EG Study Guide - Quiz Guide: Marginal Cost, Perfect Competition, Planned Economy

Document Summary

Get access

Related Documents

ECON-2006EG Study Guide - Quiz Guide: Market Price, Price Controls, Invisible Hand

ECON-2006EG Study Guide - Quiz Guide: Marginal Cost, Marginal Revenue, Invisible Hand

ECON-2006EG Study Guide - Quiz Guide: Marginal Cost, Market Distortion, Price Controls

Related Questions