Ch. 04: Consumer Surplus, Producer Surplus, and Economic Efficiency

market interventions

-like quotas or price controls -can generate disequilibrium outcomes

price ceiling

-restrictions that place an upper limit on the price that can be charged for a good or service. -sets the maximum amount that can be charged for a good or service

If a man is willing to pay $15,000 for a car and gets a car for exactly that price, would he still have derived consumer surplus from the purchase?

No, since the price he paid would be exactly what he was willing to pay for the car

price floor

a lower limit on the price of a good or service. -it sets the minimum amount that can be charged for a good or service. -ie: minimum wage

how does market equilibrium represent efficient uses of our resources?

because the market equilibrium equates the marginal benefit obtained from a good or service with its marginal cost of production

why are price ceilings and price floors highly controversial policies?

because they make some people better off while making other people worse off -they also introduce inefficiencies into the market, which we measure as the deadweight loss

why are the choices on the production possibilities frontier are efficient choices regarding how to use resources?

because they represent the maximum output that can be produced using the resources available.

how can we arrive at efficient outcomes?

by choosing opportunities where the marginal benefits are greater than the marginal costs

horizontal interpretation of a demand relationship

describes how much of a good consumers are willing and able to buy at a given price.

vertical interpretation of a demand relationship

describes the maximum amount that consumers are willing and able to pay to obtain a given amount of a good. -using the vertical interpretation of the demand relationship, the demand curve illustrates the marginal utility consumers get from each additional unit of a good consumed

vertical interpretation of a supply relationship

describes the minimum amount a producer is willing to accept to sell a good or service. This minimum amount reflects the seller's cost to produce additional unit of a good, which is the marginal cost of producing the good

if a man was willing to sell his car for $10,000 but the sale price was $14,000, what would his producer surplus have been?

he would have derived $4,000 in producer surplus from selling his car

why would a society enact policies like price floors, price ceilings or quotas that generate deadweight losses?

most often, the policies result from political presure from the groups who gain producer or consumer surplus from the policies -groups that realize a net gain from price ceilings, price floors or quotas have an incentive to pressure their government representatives to put these policies in place

producer surplus

the difference between the price at which a seller is willing and able to sell a given good and the actual price received for the good. It is the net benefit sellers get from selling a good or service, since it is the difference between the benefit they receive (the revenue they earn from the sale) and the cost of producing and selling the good.

Consumer Surplus

the difference between what someone is willing and able to pay for a good or service and the price of the good or service. It is the net benefit buyers get from buying a good or service. -the net benefit you receive fro a good, measured as your willingness to pay for the good, and the price you pay for the good

deadweight loss

the loss/reduction in economic surplus that results from disequilibrium market outcomes -represents the decrease in economic welfare or economic surplus that results from disequilibrium market outcomes -often used to measure the social costs of economic policies.

what happens at the equilibrium?

the marginal benefits are equal to marginal costs, so that equilibrium generates economic efficiency, the highest possible economic surplus and the maximum social welfare possible from the market.

what does the demand curve represent?

the marginal benefits of an activity

what does the supply curve represent?

the marginal costs of an activity

economic surplus

the sum of consumer surplus obtained by the buyers plus producer surplus obtained by the sellers -obtained from the transaction

quota

used to restrict the production of goods and services or to limit the amount of imports of goods allowed into a country (aka a limit on the quantity of a good that can be sold)

how can you calculate the dollar value of consumer surplus?

using the area for a triangle ( 1/2 * base * height)

what do you get with efficient outcomes

we get maximum net benefit or net output from our resources

how can we maximize the net benefits we receive from an activity?

when we engage in that activity until the marginal benefits are just equal to the marginal costs

If a man is willing to pay $15,000 for a car and get a car for $10,000, would he still have derived consumer surplus from the purchase?

yes; he would have derived $5,000 in consumer surplus from buying the car.