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Cards (34)
Why do supply curves typically slope upward?
Higher output levels mean increased
marginal costs
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What is the definition of efficiency in economics?
Maximization of
consumer/producer surplus
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What is consumer surplus?
Difference between
total value
and
payment
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How is producer surplus defined?
Earnings above
necessary
production costs
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What is dead-weight loss?
Loss of surplus when moving from
free market
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When is economic welfare maximized?
When
total utility
is maximized
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What is economic efficiency?
Achieved when
productive
and
allocative
efficiency exist
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What is productive efficiency?
Producing output at the
lowest possible cost
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What does allocative efficiency mean?
P equals
marginal cost
, assuming
zero externalities
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What is static efficiency?
Efficient allocation of
resources
at a point in time
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What is dynamic efficiency?
Efficient allocation of
resources
over time
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What is marginal cost?
Additional cost of producing one more
unit
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How is consumer surplus calculated in the car example?
£15,000
value minus
£12,000
payment
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What does the shaded area under the demand curve represent in consumer surplus?
Total consumer surplus
Difference between
total value
and
market price
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What is the maximum number of cars bought at £12,000?
Q
cars
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What does producer surplus represent in the car example?
Earnings above the
minimum selling price
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How is producer surplus illustrated in the car example?
Shaded area under the
supply curve
above
price line
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What is the difference between producer surplus and profit?
Producer surplus is not the same as profit
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When is economic welfare maximized?
When sum of
consumer
and
producer surplus
is maximized
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What happens when firms sell above equilibrium price?
Deadweight loss
occurs
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What is productive efficiency illustrated by in the PPF?
Points
on
the
PPF
indicate
productive efficiency
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What does allocative efficiency ensure?
No
resources
are misallocated in the economy
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How is allocative efficiency achieved at the industry level?
When cost to
society
equals benefit to society
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What does the firm's supply curve represent?
Constructed from its
marginal cost curve
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What does the law of diminishing returns state?
Each extra variable adds less to
output
eventually
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What happens when output increases beyond a certain point?
Each extra
unit
costs more than the last
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What is the relationship between marginal cost and supply curve?
Supply curve is
derived
from marginal cost curve
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What does the demand curve represent?
Maximum price
consumers are willing to pay
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What is the benefit of increasing output from 0 to 1 unit?
Benefit exceeds the
cost of production
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What happens when the fifth unit is produced?
Cost
equals
benefit
, should not be produced
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When is society's welfare maximized?
When
industry
produces where
D
equals
S
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How do changes in demand and supply affect consumer and producer surplus?
They
shift
the curves,
altering
surplus areas
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Which type of firms are expected to be most efficient in the real world?
Firms with much
competition
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What is the difference between static and dynamic efficiency?
Static is at a
point
;
dynamic
is
over
time
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