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Questions and Answers
A market is considered efficient when total surplus is maximized.
True
Market failure occurs when the forces of supply and demand allocate resources efficiently.
False
According to Adam Smith, individuals promote society’s interest by pursuing their own self-interest.
True
The invisible hand theory suggests that government intervention is necessary for efficient market outcomes.
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For markets to allocate resources efficiently, they must be perfectly competitive.
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The outcomes of market transactions only matter to the buyers and sellers involved, according to market efficiency assumptions.
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Study Notes
Market Efficiency
- A market is considered efficient when total surplus is maximized.
- Total surplus is the sum of consumer surplus and producer surplus.
- Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay, representing their gains from trade.
- Producer surplus is the difference between what producers receive for a good and their costs of production, representing their gains from trade.
- Market failure occurs when the forces of supply and demand fail to allocate resources efficiently.
- This can result in a lower total surplus for society.
- According to Adam Smith, individuals promote society's interest by pursuing their own self-interest.
- This is known as the "invisible hand" theory.
- The invisible hand theory suggests that, under certain conditions, markets can allocate resources efficiently without government intervention.
- For markets to allocate resources efficiently, they must be perfectly competitive.
- Perfectly competitive markets are characterized by many buyers and sellers, homogeneous goods, free entry and exit, and perfect information.
- The outcomes of market transactions only matter to the buyers and sellers involved, according to market efficiency assumptions.
- This means that the impacts of market transactions on other individuals, firms, or the environment are not considered.
- This is known as the "externality" problem.
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Description
Test your understanding of market efficiency and how total surplus is maximized. This quiz will cover key concepts and principles that define an efficient market. Are you ready to prove your knowledge?
