Microeconomics: Market Efficiency

At what price and quantity is economic surplus maximized? Suppose a price ceiling is imposed in the market at $750 per apartment. b. What is consumer surplus after the price ceiling is implemented? Shade in this area on the graph What is producer surplus after the price ceiling is implemented? Shade in this area on the graph. d. What is the economic loss associated with the price ceiling? Shade in this area on the graph. e. After the price ceiling is implemented, the overall economy is:

Q = 20 P = $ 1,250 e. Worse off

Surplus vs Consumer Surplus

Surplus is measured in units of output. At any given price the quantity supplied of a good is greater than the quantity demanded. Consumer surplus - measured in dollars. The benefit that consumers receive when they pay less for a good or service than the maximum price they would be willing and able to pay.

consumer surplus

The difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay. Consumer surplus can be thought of as the amount of wealth created for consumers by the market, measured in dollars produced by providing goods and services at a price (marginal cost) that is lower than the benefit consumers receive (marginal benefit). The difference is the measure of the extra wealth consumers received by participating in the market graphically consumer surplus is the area below the demand curve and above the equilibrium price from zero to the quantity traded.

productive and allocative efficiency and economic surplus and maximizing the gains from trade

a market should produce until marginal benefit equals marginal cost. if marginal benefit is measured by the demand curve and marginal cost is measured by the supply curve, then marginal benefit equals marginal cost at teh point where demand equals supply

Relative to equilibrium, if a market experiences deadweight loss there is:

less wealth created.

Deadweight loss declines in size when a unit of output is produced for which

maximum willingness to pay exceeds minimum acceptable price.

The market supply curve indicates the

minimum acceptable prices that sellers are willing to accept for the product.

The graph represents the market for artichokes (in pounds per week) at a Midwest farmers' market. Suppose the equilibrium price of artichokes is $3 per pound and the equilibrium quantity is 100 pounds of artichokes per week. Using the graph, show the area representing economic surplus in this market, and then determine how much economic surplus is generated in the market each week.

price 9-1 = 8 quantity = 100 area of triangle= 1/2(bxh) 1/2 (8*100) = 800/2 = 400 Economic surplus = $400

What is the amount of deadweight loss after the government imposes the excise tax on the market?

price= 15-11=4 quantity=40-36=4 area of a triangle= 1/2 (bxh) 1/2 (4*4)= 16/2 = 8

producer surplus vs profit

producer surplus is not the same as profit selling product for more than the cost to produce them at margin, profit would be this amount less expenses

The amount of revenues that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called

producer surplus.

price ceiling

producers are hurt by a price ceiling,

The additional benefit of producing one more roast beef sandwich at a local deli is $2. The additional cost of producing one more roast beef sandwich is $3. To improve allocative efficiency:

producers should not produce one more roast beef sandwich because MC > MB.

productive efficiency

producing output at the lowest average total cost of production using the fewest resources possible to produce a good or service

allocative efficiency

producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost Marginal benefit of Last unit = marginal cost of last unit MB=MC

Suppose that 100 pounds of tofu are supplied to the market.. The equilibrium amount is 200. Is this level of production allocatively efficient?

production of 100 pounds is not allocatively efficient because the marginal benefit of the last pound produced is $6 per pound with the marginal cost is $3 per pound. Because marginal benefit is greater than marginal cost at 100 pounds, more tofu should be produced

What area represents tax revenue after the government imposes the excise tax on the market?

square $13ac$9

Surplus example individual Marginal Benefit Martin $120 Oscar $110 Monica $100 Clara $ 90 Victor $ 80 If the market price of sunglasses is $95, how mch consumer surplus is generated for each person?

Determine who purchases the sunglasses. The marginal benefits equal to or above the market benefit will be a purchaser Consumer surplus = Marginal benefit - market price >/= 0 individual Consumer surplus Martin $25 Oscar $15 Monica $5 anyione below the market price is not a consumer of the good. total consumer surplus is the sum of all = $45 at lower prices, consumers pay less and can purchase more, increasing consumer surplus

Consumer surplus

is the difference between the maximum price consumers are willing to pay for a product and the lower equilibrium price.

In the market for a pair of shoes, Jena is willing to pay $75 for a pair while Jane is willing to pay $85 for a pair. The actual price that each must pay for a pair of shoes is $65. What is the combined amount of consumer surplus of Jena and Jane?

$30

If the market price is $6 per book, how much producer surplus is created for sellers? Shade in this area on the graph.. Suppose the market price increases to $10 per book. Producer surplus in the market will increase for two reasons. a. First, producers will gain additional surplus on the books already sold. How much additional producer surplus is gained from the higher price on each existing book sold? Shade in this area on the graph. b Second, producers will gain surplus when more books are produced. How much producer surplus is gained from the production of new books? Shade in this area on the graph.

1 - PS (dark pink - the area above the supply line up to the market price) a - PS add (light pink - the area above the initial price to the new price, then to the original product amount at 1st equilibrium b - PSnew (yellow) the area from the initial price to the new price, to the right of the original product amount at 1st equilibrium to the new product amount at new equilibrium

Based on the graph, At equilibrium, consumer surplus is:

35-15=20 height 20-0=20 base area of a triangle= 1/2(bxh) 1/2(20*20)= 400/2=200

Use the table below to answer the following question. Units | Max Willingness to Pay | Market Price | Min Acceptable $ 1 $14 $8 $2 2 12 8 4 3 10 8 6 4 8 8 8 5 6 8 10 6 4 8 14 At what level of output is allocative efficiency achieved?

4 because the max willingness to pay is equal to min acceptable at market price

welfare economics

A branch of economics that focuses on measureing the welfare of market participants and how changes in the market change their well-being. how much wealth a market creates, and how changes in the market might affect how much wealth is created.

productive and allocative efficiency and deadweight loss

Allocative efficiency = no deadweight loss Deadweight loss = not allocatively efficient

Area of a rectangle

Area= length x width

Quantity Demanded and Quantity Supplied versus Quantity Traded

At prices above equilibrium price, firms wont sell all of the output produced. At prices below the equilibrium price, firms will not provide as much output as consumers would like to purchase

Productive efficiency occurs at the point where

The production technique minimizes average (or per unit) cost

If the market price of a good decreases, the quantity demanded will

increase and consumer surplus will increase.

If the output level is Q2, then there will be

allocative efficiency.

Area of a triangle

area= 1/2 (base x height)

Andy purchases coffee from the local coffee shop. When the price of a cup increases by $0.50, Andy's

consumer surplus decreases.

taxes

create a wedge between the price that buyers pay and the price that sellers receive. they reduce economic activity as the quantity traded falls below the equilibrium quantity. because the price buyers pay is greater than the price suppliers receive, a market with a tax in place is not allocatively efficient. tax revenue collected = amount of the tax x new equilibrium amount

If actual production and consumption occur at Q1 and the price is P2, deadweight loss equals area

d.

producer surplus

the difference between the price producers receive for a good or service and the minimum price they are willing and able to accept. Producer surplus also can be thought of as the wealth that trade creates for producers in a market. Producer surplus is measured in dollars Graphically, producer surplus is the area below the equilibrium price and above the supply curve from zero to the quantity traded.

If a price ceiling in this market is set at P1, then

the government does not raise revenue.

At the output level defining allocative efficiency

the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.

wealth

the monetary value of everything one actually owns

if the price of sunglasses is $80, what is the producer surplus?

the producercer surplus is the area above the supply covrve and below the price. so if the price is $80, the producer surplus is everything above the supply curve and below $80

productive and allocative efficiency and production possibilities frontier

the production possibilities fronter shows us how much of two goods an economy can produce when it is using all available resources as efficiently as possible. If it is on the PPF the economy is productively efficient Allocative efficiency refers to producing the goods people most want

economic surplus

the sum of consumer and producer surplus a measure of the total welfare or wealth that trade creates for consumers and producers in the market. Also known as social welfare or total surplus

deadweight loss

the value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium occurs when too much or too little output gets produced. the area between the supply and demand curves, from the current level of output to the level at which supply meets demand. determine the base and height of that triangle the sum of consumer surplus, producer surplus and deadweight loss will equal the economic surplus

If actual production and consumption occur at Q1

there is deadweight loss of b + d.

In a market for bottled water, suppose the initial equilibrium price is $2 and that 600 bottles of water are traded at tht price. Calculate the amount of consumer surplus in the market.

when calculating consumer surplus for an individual , you subtract the market price from the person's willingness to pay. When looking at the entire market, calculate the area below the demnd curve and above the equilibrium price from zero to the quantity traded. the base of the triangle is the quantity that is being traded in the market (600) the height of the triangle is the difference between the market price ($2) and the highest point on the demand curve ($5), in this case it will be $3 consumer surplus (CS) =1/2 (600x3) $900

productive and allocative efficiency and marginal benefits and costs in equilibrium

when the activity is production of a good or service, the optimal amount of the activity is referred to as the allocative efficient level of output. competitive markets tend to gravitate to this level of output naturally by producing amounts at which supply=demand