AREC Midterm 2

• In a Monopsony, Sellers are worse off and buyers are better off 


  In a monsopoly there is one buyer and many sellers. The buyer has all the market power and faces an upward sloping supply curve. The monsosponist can explout their market power to pay a lower price for less input, resulting in improved welfare for themselves.
• The price transmission equation and the marketing margins are similar in that they both show how retail and farm prices are related to eachother while quantifying price diffrences due to marketing activites
• How is the price transmision equation derived?

  It is derived using the marketing margin, such that retail price = farm price + margin.
• if the government imposes a producer tax at farm level, retail prices will increase due to shift in retail supply. Why?

  Producer tax shifts farm supply up, resulting in the price paid by retailers. it then causes an upward shift in retailer MC curves.
• The structure conduct performance paradigm provides a basis of explaining...


  Why perfectly competitive firms can earn economic profit

  how monopolies use market power to generate profit
• What is government intervention?

  Taxes subsidies, reulations ect
• Why would a government intervene in a market?

  Politics

  Fairness and equity

  adress externalities

  generate revenue
• Total benefit = Total welfare + total taxpayer benefit
• If TPB >0 then government revenue

  if TPB <0 then government expendeture
• What is the price wedge?

  The difference between what consumer pay and what producers recive
• What happens to the marginal cost curve when there is a tax paid by producers?

  Inwards shift in marginal cost, leading to an inwards shift in supply
• What are the welfare results of a producer tax?

  A decrease in producer surplus, and a decrease in consumer surplus. overall decrease in total welfare
• a more elastic supply means a greater producer welfare. A less elastic supply means a smaller producer welfare
• A more inelastic demand means a greater smaller consumer welfare, and greatter tax burden on producer
• a more elastic demand means a smaller consumer welfare and heavier tax burder on consumer
• a subsidy is also known as a negative tax
• A producer subsidy causes an outward shift in marginal cost
• What are the welfare impacts of a subsidy?

  Consumer surplus increases, producer surplus increase, negative tax payer benifit
• taxpayers are worse off from a subsidy, but also equally benifit
• What are the welfare implications of a quota?

  Increase producer surplus, decreased consumer surplus, and DWL
• What does the long-run equilibrium look like in a perfectly competitive market?

  Frim level AR is perfectly elastic, and = MR. Y* is at min ATC, AR=MC and there is zero economic profit
• If farm supply shifts due to a beneficial new farm technology being adopted by farm producers, we would expect retail supply to shift as well because

  marginal Cost (MC) curves for individual retailers will shift since the cost of their input will change
• If structure changes in a vertical market so that there is a monopoly at the farm level, we can say the following about the market equilibrium

  retail price will increase because a shift in individual retailer marginal cost (MC) curves
• A retail supply may shift up and in because?

  the introduction of a monopoly at retail level

  the introduction of a farm level producer tax

  a decrease in the marketing margin
• Because farm demand is more inelastic than retail demand:


  Farm prices are more volatile than retail prices
• In a vertical market scenario with two market levels (retail and farm), primary demand differs from derived demand in that:

  Primary demand is based on the consumer indifference curve while derived demand is based on MVP curve
• If a market is structured as a monopsony we can definitively say that

  the market equilibrium is economically inefficient
• If a producer tax is introduced for a product, a bigger share of the welfare loss is likely to be borne by consumers if:

  the product is a necessity for consumers
• a decrease in equilibrium Q due to a shift in consumer tastes and preferences will not result in a dead weight loss
• The introduction of a producer subsidy for a product will result in deadweight loss in the market because:

  resources that are more efficiently utilized elsewhere move into this market
• In economics, consumer surplus may be defined as

  aggregate well-being for consumers in the market based on what they would be willing to pay relative to the market price
• The term “technology treadmill” refers to the following:

  the continuing need for improved technology to provide welfare benefits for producers with those benefits mainly being received by early adopters
• A change in consumer preferences will result in increased producer welfare if:

  consumer demand shifts up and out and supply is elastic

  or inelastic
• What are the characteristics of a competitive market?

  No product differentiation

  consumers and producers have equal information

  any costs and benefits associated with productions and consumption are incorporated into the supply function
• why is there no positive economic profit in the long run?

  if one producer is earning economic profit, others enter the market and bring resoruces, shifting Q down, which will shift down marginal revenue and AR
• what are the 3 impacts of market structure?

  Structure (# of firms, barries, product)

  Conduct (price and quantity)

  Performance (profit and welfare)
• market demand can be interpreted as the market AR curve
• marginal revenue curve atthe market level is the change in revenue from an extra unit of output in the market
• in the short run monopolies will experience economic profit
• What are the welfare impacts of a monopoly?

  Increase in producer surplus, big decrease in consumer surplus, big DWL