Module 2 (CBM) Reviewer

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 Competition refers to a situation in a WELFARE ECONOMIC

market in which firms or sellers


 study of how the allocation of resources
independently strive for the patronage
affects economic well-being. We begin
of buyers in order to achieve a
by examining the benefits that buyers
particular business objective like profits,
and sellers receive from engaging in
sale nor market share.
market transactions. We then examine
Perfect competition how society can make these benefits as
large as possible.
 is an abstract that occurs in economic
 Is the study of how the allocation of
text books but not in the real world
resources affects economic well-being
because we all know that it is
 refers to:
impossible to attain in real life.
1. how much of each good is produced
 is a concept in microeconomics that
2. which producers produce it
describes a market structure controlled
3. which consumers consume it
entirely by market forces. If and when
 In general, it refers to how well people
these forces are not met, the market is
are doing. For example, people’s living
said to have imperfect competition.
standards are also influenced by factors
 A flea market or farmer's market are
such as levels of health care, and
best examples for this. Consider the
environmental factors
stalls of our crafters or farmers in the
market who sell the same products. Factors that influence welfare economics
This market environment is
 Real income – influences potential
characterized by a small number of
consumption FOR EXAMPLE residential
buyers and sellers. There may be little
accommodation, goods and services
to differentiate between the products
that a person acquires.
each crafter or farmer sells, as well as
 Employment prospects –
their prices, which are typically set
unemployment significant cost for
evenly among them.
example once a person is hired for a
IMPERFECT COMPETITION position or career.
 Job satisfaction – from the word itself,
 Exists whenever a market, hypothetical
satisfaction at work as important as
or real, violates the abstract tenets of
income and wage Housing
neoclassical perfect competition. In this
 High income - but unaffordable housing
environment, companies sell different
diminishes economic welfare.
products and services, set their own
 Education – opportunities to study
individual prices, fight for market share,
through lifetime Life expectancy and
and are often protected by barriers to
quality of life – it refers to the access of
entry and exit.
healthcare, also healthy lifestyle such as
 Imperfect Competition also known as
levels of obesity/smoking rates.
Monopolistic Market an industry in
 Happiness levels – with this, normative
which many firms offer a products or
judgements on whether people are
services that are similar (not a perfect)
happy.
substitute
 Environment – it is the economic USING THE DEMAND CURVE TO MEASURE
growth that can cause increased CONSUMER SURPLUS
pollution, which damages health and
living standards in the society.
 Leisure time – because high wages due
to working very long hours also
diminishes economic welfare.

CONSUMER SURPLUS

 Consumer surplus is measured as the


area below the downward-sloping
demand curve, or the amount a
consumer is willing to spend for given
 The demand curve is a graphic
quantities of a good, and above the
representation used to calculate
actual market price of the good,
consumer surplus. It shows the
depicted with a horizontal line drawn
relationship between the price of a
between the y-axis and demand curve.
product and the quantity of the product
Consumer surplus can be calculated on
demanded at that price, with the price
either an individual or aggregate basis,
drawn on the y-axis of the graph and
depending on if the demand curve is
the quantity demanded drawn on the x-
individual or aggregated.
axis.
 is an economic measurement of
consumer benefits resulting from PRODUCER SURPLUS
market competition. A consumer
surplus happens when the price that
consumers pay for a product or service
is less than the price, they're willing to
pay.

WILLINGNESS TO PAY

 It's generally expressed as a range to


represent different people's opinions
and also the fluctuation over time
because willingness to pay can be
influenced by a number of factors
including: The economy. Since we all  is the difference between the actual
know that it is the the highest amount price of a good or service–the market
your customer is willing to pay for a price–and the lowest price a producer
product or service. would be willing to accept for a good.
 it is the maximum amount that a buyer
will pay for a certain good that he/she
needs or want.
 Cost - it is the value of everything a  As the equilibrium price increases, the
seller must give up to produce a good. potential producer surplus increases. As
 Willingness to sell - is the opportunity the equilibrium price decreases,
cost of producing it, but would sell if producer surplus decreases. Shifts in
the price was greater than the cost of the demand curve are directly related
producing it. to producer surplus. If demand
increases, producer surplus increases
USING THE SUPPLY CURVE TO MEASURE THE
PRODUCER SURPLUS MARKET EFFICIENCY

 refers to the extent that market prices


reflect all available information.
investors can only get returns that
compensate for time value of money
and risks. no such thing as abnormal
returns in an efficient market. Here are
the 3 forms of market efficiency
 Refers to how well current prices reflect
all available, relevant information about
the actual value of the underlying
assets.
 WEAK -I t suggests that today’s stock
prices reflect all the data of past prices
 With supply and demand graphs used and that no form of technical analysis
by economists, the producer surplus can be effectively utilized to aid
would be equal to the triangular area investors in making trading decisions.
formed above the supply line over to  SEMI - it is an efficiency theory follows
the market price. It can be calculated as the belief that because all information
the total revenue less the marginal cost that is public is used in the calculation
of production. of a stock's current price, investors
cannot utilize either technical or
HOW A HIGHER PRICE RAISES PRODUCER
fundamental analysis to gain higher
SURPLUS
returns in the market.
 STRONG - it is a version of the efficient
market hypothesis states that all
information—both the information
available to the public and any
information not publicly known—is
completely accounted for in current
stock prices, and there is no type of
information that can give an investor an
advantage on the market.
MARKET FAILURE PUBLIC GOODS

 A market failure is when there is an  The assumption is that private


inefficient distribution of goods and companies and organizations won’t
services that leads to a lack of
equilibrium in a free market. The law of
supply and demand is meant to lead to
an equilibrium in prices, and when it
does not it indicates a factor in the
market has failed.
 is a situation where free markets fail to
allocate resources efficiently.
 4 Major Types of Market Failure:
1. Market Power
2. Imperfect Information
3. Public Goods
4. Externalities

THE BENEVOLENT SOCIAL PLANNER

 It is an all-knowing, all-powerful, well-


intentioned dictator, the planner wants
to maximize the economic well-being of
everyone in society.
 Social Planners study community needs,
examine the social impacts of
development, and design strategies to
enhance and benefit the community.

EVALUATING THE MARKET EQUILIBRIUM

 Market equilibrium refers to a situation


where quantity demanded and quality
supplied of a good are equal. In other
words, market equilibrium is a situation
of zero excess demand and zero excess
supply

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