Chapter 16 general equilibrium and economic efficiency
partial equilibrium analysis = determination of equ. prices and quantities in a market
independent of effects from other markets.
General equilibrium analysis = simultaneous determination of p and q in all relevant markets.
Feedback effect = price or quantity adjustment in one market caused by price or quantity
adjustment in other markets.
To find general equ. prices, we must simultaneously find two prices that equate quantity
demanded and quantity supplied in all related markets.
Comparative advantage = situation in which country 1 has advantage over country 2 in
producing a good because the cost of producing the good in 1, relative to the cost of
producing other goods in 1, is lower than the cost of producing the good in 2, relative to the
cost of producing other goods in 2.
Absolute advantage = situation in which country 1 has advantage over country 2 in
producing a good because the cost of producing the good in 1 is lower than the cost of
producing it in 2.
When there is comparative advantage, international trade has the effect of allowing a
country to consume outside its production possibilities frontier.
Competitive markets fail because: market power, incomplete information, externalities and
public goods.
Efficiency requires that the marginal rate of technical substitution be equal in production of
all goods.
Chapter 17 markets with asymmetric information
Lemons problem: with asymmetric information, low-quality goods can drive high-quality
goods out of the market.
Adverse selection = form of market failure resulting when products of different qualities are
sold at a single price because of asymmetric information, so that too much of the low-quality
product and too little of the high-quality product are sold.
Often does the seller knows more than buyers. Unless sellers can provide info about quality,
low-quality goods will drive out high-quality ones, and there will be market failure.
But producers have a reputation to uphold.
Standardization: alternative for reputation, know what to expect.
Moral hazard = when party whose actions are unobserved can affect the probability or
magnitude of a payment associated with an event.
For most goods that are provided privately, the mc is positive.
Chapter 18 externalities and public goods
partial equilibrium analysis = determination of equ. prices and quantities in a market
independent of effects from other markets.
General equilibrium analysis = simultaneous determination of p and q in all relevant markets.
Feedback effect = price or quantity adjustment in one market caused by price or quantity
adjustment in other markets.
To find general equ. prices, we must simultaneously find two prices that equate quantity
demanded and quantity supplied in all related markets.
Comparative advantage = situation in which country 1 has advantage over country 2 in
producing a good because the cost of producing the good in 1, relative to the cost of
producing other goods in 1, is lower than the cost of producing the good in 2, relative to the
cost of producing other goods in 2.
Absolute advantage = situation in which country 1 has advantage over country 2 in
producing a good because the cost of producing the good in 1 is lower than the cost of
producing it in 2.
When there is comparative advantage, international trade has the effect of allowing a
country to consume outside its production possibilities frontier.
Competitive markets fail because: market power, incomplete information, externalities and
public goods.
Efficiency requires that the marginal rate of technical substitution be equal in production of
all goods.
Chapter 17 markets with asymmetric information
Lemons problem: with asymmetric information, low-quality goods can drive high-quality
goods out of the market.
Adverse selection = form of market failure resulting when products of different qualities are
sold at a single price because of asymmetric information, so that too much of the low-quality
product and too little of the high-quality product are sold.
Often does the seller knows more than buyers. Unless sellers can provide info about quality,
low-quality goods will drive out high-quality ones, and there will be market failure.
But producers have a reputation to uphold.
Standardization: alternative for reputation, know what to expect.
Moral hazard = when party whose actions are unobserved can affect the probability or
magnitude of a payment associated with an event.
For most goods that are provided privately, the mc is positive.
Chapter 18 externalities and public goods
