Key takeaways

  • • Under conditions of scarcity, all actions have an opportunity cost.
  • • With many firms and consumers, vigorous competition, and no negative externalities, markets tend to perform well in terms of producing efficient outcomes.
  • • It is often important to quantify demand and supply responses to changes in price changes and changes in other factors.This is typically represented with the notion of an elasticity.
  • • Monopoly conditions tend to result in underproduction and social deadweight loss.
  • • Uninternalized negative externalities tend to result in overproduction and social deadweight loss.
  • • When outcomes occur at different points in time, future outcomes must be discounted to make them comparable to earlier ones.
  • • Dynamic efficiency is achieved by markets in multiple-period settings, under the same competitive assumptions as in single-period settings.

Key concepts

  • • Opportunity cost
  • • Marginal thinking
  • • Comparative statics
  • • Elasticity
  • • Consumer surplus
  • • Producer surplus
  • • Social deadweight loss
  • • Market power
  • • Discounting
  • • Intertemporal allocation
  • • Dynamic efficiency

Answers to “Test your understanding” questions

Question 2.1 (a) England: (i) OC of 1 bottle of wine: 1 lb of cheese; (ii) OC of 1 lb of cheese: 1 bottle of wine, (b) France: (i) OC of 1 bottle of wine: !4 lb of cheese; (ii) OC of 1 pound of cheese: 4 bottles of wine.

Question 2.2 24.

Question 2.3 (a) 3 hours, (b) NB = 9. (c) Yes, because BC = 1.86. Equivalently, NB are positive.

Question 2.4 Equilibrium quantity = 5,000 tons. Equilibrium price = $70 per ton.Total expenditures = $350,000.

Question 2.5 Cannot tell. Increasing consumer incomes should shift demand upward/ outward, while decreasing fuel prices should shift supply downward/outward. The overall effect on prices depends upon the relative magnitudes of the demand and supply shifts. Without more information, we cannot tell whether prices will go up or go down.

Question 2.6: (a) Positive, (b) Normative, (c) Positive.

Question 2.7 (a) Net benefits = $24,000. (b) SDWL = $6,000.

Question 2.8 (a) Equilibrium price = $5 per sub, equilibrium quantity' = 1,000 subs, (b) Consumer surplus = S5,000, producer surplus = SO.

Question 2.9 (a) Equilibrium monopoly price = $600 per ton, equilibrium quantity = 4000 tons, (b) SDWL = S800.000

Question 2.10 (a) Steel is overproduced by 300 tons, (b) SDWL = $18,000.

Question 2.11 (a) 750 million barrels of oil are produced in year 0, 700 million barrels are produced in year l.The year 0 price per barrel is $30 and the year 1 price is $36.

 
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