Question 1

Many economists believe that a market in human organs would lead to both an efficient allocation and fair distribution of organs.

Accepted Answer

While some economists argue that a market could increase the supply of organs and potentially allocate them more efficiently, there is significant concern that it would not lead to a fair distribution, as those with more resources would have better access, potentially exacerbating inequalities.

Question 2

At all quantity levels the price given by the supply curve shows the cost of the lowest cost seller.

Accepted Answer

The price given by the supply curve at any quantity level reflects the cost of the marginal seller, not necessarily the lowest cost seller. The marginal seller is the one who is willing to supply the last unit of the good at that price, which could be higher than the lowest cost seller.

Question 3

The producer surplus in a market is the area above the price plus the area below the demand curve.

Accepted Answer

This is the correct definition of producer surplus, as it represents the difference between the price that producers are willing to sell a good at and the price they are actually able to sell it for, which is shown by the demand curve. The total producer surplus is therefore the area above the market price up to the supply curve.

Question 4

Total surplus in a market is consumer surplus minus producer surplus.

Accepted Answer

Total surplus in a market is the sum of consumer surplus and producer surplus, not the difference between the two.

Question 5

Efficiency refers to whether a market outcome is fair, while equity refers to whether the maximum amount of output was produced from a given number of inputs.

Accepted Answer

Efficiency refers to whether the maximum amount of output was produced from a given number of inputs, while equity refers to whether the benefits and costs of the market outcome are fairly distributed among the participants.

Question 6

An allocation of resources that maximises total surplus is said to be equitable.

Accepted Answer

An allocation that maximizes total surplus is said to be efficient, not necessarily equitable. Equity refers to fairness or justice in the distribution of resources, which is not guaranteed by maximizing total surplus.

Question 7

Free markets allocate (1) the supply of goods to the buyers who value them most highly and (2) the demand for goods to the sellers who can produce them at least cost.

Accepted Answer

This is a basic principle of economics and a fundamental concept of free market theory. Buyers are willing to pay the highest price for goods they value the most, and sellers will provide goods at the lowest price they can produce them. This creates an efficient allocation of resources and promotes overall economic growth.

Question 8

When market price increases, producer surplus increases because (1) producer surplus received by existing sellers increases and (2) new sellers enter the market.

Accepted Answer

When market price increases, the producer surplus received by existing sellers increases as they are able to sell their products at a higher price. Additionally, new sellers may enter the market to take advantage of the higher prices, which also increases producer surplus overall. Therefore, both statements are true and support the conclusion that producer surplus increases when market price increases.

Question 9

Laissez-faire is a French expression that literally means 'let the market fare well'.

Accepted Answer

Laissez-faire actually means "let do" or "let it be" in French, and is commonly used in economics to refer to a hands-off approach to government intervention in market activities.

Question 10

Total surplus in a market can be measured as the area below the supply curve and the area above the demand curve.

Accepted Answer

The answer of Total surplus in a market can be...

Question 11

If some buyers and sellers are prevented from trading, the efficient allocation will not occur.

Accepted Answer

The exclusion of certain buyers and sellers from trading reduces the pool of potential participants in the market, limiting the number of trading possibilities and preventing the efficient allocation of goods and resources. This can result in situations where mutually beneficial transactions do not occur, and losses in efficiency and welfare may arise.

Question 12

Jean wants to sell her camera. Greg offers her $250. Lee offers her $300. Jean decides to sell the camera to Greg because he made the first offer. This is an example of an efficient market transaction.

Accepted Answer

An efficient market transaction is one where all available information is reflected in the price, and buyers and sellers can easily enter and exit the market. In this case, Jean did not consider all available offers and did not allow for other potential buyers to enter the market, making it an inefficient transaction.

Question 13

Many economists believe that a market in human organs would lead to an efficient allocation of organs.

Accepted Answer

Many economists argue that allowing the sale of organs would increase the supply of organs, as people would have a financial incentive to donate them. This would lead to a more efficient allocation of organs, as those who value them the most (i.e. those willing to pay the most) would be the ones to receive them. However, there are also concerns about exploitation and inequality, as only those who can afford to pay for organs would have access to them.

Question 14

Consumer surplus = Price of the good.

Accepted Answer

Consumer surplus is not equal to the price of the good, but represents the difference between the willingness to pay of the consumer and the actual price paid for the good.

Question 15

The tools of consumer surplus and producer surplus enables us to determine whether free-market allocation of resources is desirable.

Accepted Answer

Consumer surplus and producer surplus provide a way to measure the benefits and costs of economic transactions. By comparing the total value that consumers place on a good or service (consumer surplus) with the total cost of producing it (producer surplus), we can assess whether the free-market allocation of resources is efficient and desirable. If the sum of consumer and producer surplus is maximized, then the free-market allocation is considered optimal. If not, there may be a case for government intervention to correct market failures and improve economic efficiency.

Question 16

Total surplus = Value to buyers - Costs to sellers.

Accepted Answer

This is the definition of total surplus, which measures the overall welfare generated by a transaction in a market. It takes into account both the benefits to buyers (value) and the costs to sellers.

Question 17

Even though participants in the economy are motivated by self-interest, the 'invisible hand' of the marketplace guides this self-interest into promoting general economic wellbeing.

Accepted Answer

This is the concept of the invisible hand, first introduced by Adam Smith in The Wealth of Nations. Smith argued that individuals pursuing their own self-interest in a free market system would ultimately lead to a more efficient allocation of resources and greater overall economic wellbeing.

Question 18

Producer surplus measures the cost to sellers of participating in a market.

Accepted Answer

Producer surplus measures the benefit that sellers receive from participating in a market, not the cost. It is the difference between the price at which producers are willing and able to sell a product and the minimum price they would have been willing to accept for producing it.

Question 19

Economists believe that government control of markets is most often the best way to organise economic activity because they lead to an efficient allocation of resources.

Accepted Answer

Economists generally believe in the free market system, where supply and demand determine prices and resource allocation. While some government intervention may be necessary to mitigate market failures, such as market power and externalities, excessive government control can often lead to inefficiencies and distortions in the allocation of resources.

Question 20

Efficiency is related to the size of the economic pie, whereas equity is related to how the pie gets sliced and distributed.

Accepted Answer

Efficiency pertains to the overall size or growth of the economy, while equity pertains to the fairness and justness of how resources and benefits are allocated and distributed within the economy.

Quiz 7: Consumers, Producers and the Efficiency of Markets