Exam 2: Modeling the Market Process: a Review of the Basics

The sum of the change in consumer surplus plus the change in producer surplus is called deadweight loss to society.

Market demand for a private good is found by vertically summing individual demands.

If a market is perfectly competitive, allocative efficiency is achieved at the point where the profit-maximizing firm produces.

Producers' decisions are modeled through the demand function, and consumers' decisions are captured by the supply function.

If the market for a good or service is competitive,

Consumer surplus is the net gain to the firm measured as the excess of price over the marginal cost of production summed over all units sold.

When a profit-maximizing firm increases output to Q = 50, its MR = $100 and MC = $124, meaning that total profit falls by $24, so the firm should contract production.

If a perfectly competitive firm is a profit-maximizer, it produces where

If Q_S = -10 + ½ P, the slope of supply, when conventionally graphed, is +½ .

Equilibrium price is the price level at which Q_D equals Q_S.

If a consumer is willing to pay more for a good than he/she actually must pay, he/she enjoys a gain for that unit of output known as consumer surplus.

If a firm maximizes output from a stock of available resources, it must be achieving allocative efficiency.

A change in price results in a shift in the demand curve.

If a firm makes production decisions such that it achieves maximum output from a fixed stock of resources, this means that this firm is

In perfect competition, the firm faces a perfectly inelastic demand.

If the price level is such that quantity supplied exceeds quantity demanded, there is excess demand, or a shortage in the market.

According to the Law of Supply,

Allocative efficiency in a market means that resources are appropriated such that

According to the theory of demand,

The demand price represents the consumer's willingness to pay for the good.