ECON 202 Chapter 4

Who gets the products during a shortage?

1. First come - first served. 2. Friends, relatives, long-term customers. 3. Limit everyone to only a few gallons. 4. Direct distribution.

What happens when government imposes price floors or price ceilings?

1. Some people win. 2. Some people lose. 3. There is a loss of economic efficiency.

Price Ceiling

A legally determined maximum price that sellers may charge.

Price Floor

A legally determined minimum price that sellers may receive.

Economic Efficiency

A market outcome in which marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

What is the consequences of a shortage?

Black market.

Is economics positive or normative?

Economics is about positive analysis, which measure the cost and benefit of different courses of action.

Equilibrium in a competitive market

Equilibrium in a competitive market results in the greatest amount of economic surplus, or total net benefit to society, from the production of a good or service.

Positive Analysis

Explains why things work the way they do in the real world.

Normative Analysis

Makes statements about how thing should be.

The maximum price consumer is willing to pay =

Marginal benefit from the first cup of tea.

Is our analysis positive or normative?

Our analysis is positive. Whether these programs are desirable or undesirable is a normative question.

Who does price ceiling protect?

Price ceiling protects consumers. Ex. Apartment rent control in New York and Gasoline price control during the oil shocks in 1970's.

What is the purpose of a price floor?

Protect the producers. Ex. "Farm Program" During the Great Depression many farmers could sell their products only at very low prices. To protect the farmers government set price floor for many agricultural products.

Taxes

Taxes are used to pay for surplus or subsidies which the government is forced to pay the farmers for to restrict their supply.

Tax incidence (Tax Burden)

The actual division of the burden of a tax between buyers and sellers in a market.

Marginal Benefit (MB)

The additional benefit to a consumer from consuming one more unit of a good or service.

Marginal Cost (MC)

The additional cost to a firm of producing one more unit of a good or service.

Consumer Surplus (CS)

The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays. Consumer surplus measure the net benefit to consumers from participating in a market rather than the total benefit. Consumer surplus = total benefit minus the payment to producers.

Producer Surplus

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. Producer surplus measure the net benefit received by produces from participating in a market. Producer surplus = payment from consumers minus cost of production.

Equity

The fair distribution of economic benefits. Taxes reduce efficiency. Government raise taxes on people with high incomes to provide for the poor, unemployed, public goods, etc. This provides a more equal distribution of economic benefits. There is often a trade-off between efficiency and equity.

What determines the incidence of tax?

The forces of demand and supply working in the labor market, and not congress, determine the incidence of the tax.

Deadweight Loss (DWL)

The reduction in economic surplus resulting from a market not being in competitive equilibrium.

Economic Surplus

The sum of the consumer surplus and producer surplus.

Where is Consumer Surplus in a graph?

The total amount of consumer surplus in a market is equal to the market price and below the market demand curve.

Where is the Producer Surplus in a graph?

The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price.

What happens to the economic surplus when the government imposes a price?

When the government imposes a price ceiling or price floor, the amount of economic surplus in a market is reduced.