Ch 7.docx

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University of Toronto Mississauga
Multiple Professors

Ch 7 A simple market modelAllocative efficiency a situation in which the factors of production have been allocated so as to reflect what people demand ie demand matches supply Social welfare is maximized as MBMC in all markets and there can be no substitution between markets to increase welfare beyond its current levelMarket Equilibrium a situation where the price in a given market is such that the quantity demanded is equal to the quantity suppliedPareto efficiency a situation in which there is no way of making any person better off without making someone else worse offa point on the production possibilities frontierPerfect competition a market in which there are many suppliers each selling an identical product and many buys who are completely informed about the price of each suppliers product and there are no restriction on entry into the maketPrice taker a supplier that cannot influence the price of a good or service they supplyThe basic ingredients of a marketa perfectly competitive market sometimes termed a free market is a market in which there is no intervention or regulation by the state except to enforce private contracts and the ownership of property A perfectly competitive market is the opposite of a controlled market in which the state directly regulates how goods services and labor may be used priced or distributedmany health systems around the world are currently implementing or reviewing marketoriented reforms within the health sector These reforms are based on the idea that markets work well or are efficientMarket equilibriumeconomists use the term equilibrium to describe a system that is balanced stable and in a state of harmony When that system is a market equilibrium occurs when all participants are satisfied If not in eqbm the market will work to return to eqbmfor example if there is excess demand consumers bid up the price while if there is excess supply producers cut the price So the free interaction of consumers and producers in the market automatically leads to a situation where the quantity supplied matches the quantity demanded ie allocative efficiency
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