Econ Ch. 4
price ceiling
-a legally determined maximum price that sellers may charge -market price cannot go above (rent control)
price floor
-a legally determined minimum price that sellers may receive -market price cannot go below (minimum wage)
tax incidences - who pays the tax?
-amt of tax is Pd - Ps -consumers pay Pd - P* -producers pay P* - Ps -pay pays more depends on how sensitive they are to a price change (sellers often end up paying more)
welfare
-benefit to consumers and producers that we can measure. these benefits are called "surplus" (not surplus of quantity supplied over quantity demanded: consumer surplus, producer surplus, total surplus - all welfare measures that allow us to compare diff market events)
total surplus
-combination of consumer and producer surplus -need to know what consumers are willing to pay: demand and supply
allocative efficiency
-economically efficient: produce and purchase until marginal benefit is equal to marginal cost -everyone who benefits more/at least as much as it costs to produce the unit gets to purchase one -total surplus is maximized, MB=MC, CS+PS is maximized
depends on supply and demand curve but generally price floors benefit who? and price ceilings benefit who?
-floors - producers benefits -ceilings - consumers benefits
tax causes
-increase in cost of production which causes supply curve to shift to the left for a decrease in the supply -consumers and producers worse off -govt collects tax revenue equal to (Pd - Ps)Qm
if total surplus is not maximized then,
-not being allocatively eff -sold too many/too few units -total surplus decreased/not maxed -if we were allocatively eff DWL = 0
at Pf..
-producers want to sell Qs buyers want to buy Qd, that leaves the market with a surplus where Qs > Qd -too many products to sell at Pf (minimum wage, the surplus is unemployed workers - more workers than jobs)
2 notions of efficiency
-productive -allocative
Pc < P*
-shortage which causes other problems other than loss of Cs and Ps. (black market)
when govt imposes price floors or ceilings three important results occur
-some people win -some people lose -there is a loss of economic efficiency
consumer surplus
-the difference between the highest price a consumer is willing to pay for a good or service and the actual price a consumer pays -the area below the demand curve above the price for all units purchased (market price) -dollar benefit consumers receive from buying goods or services
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 -area below market price and above the supply curve for all units sold -dollar benefit firms receive from selling goods or services in a particular market
deadweight loss
-the reduction in economic surplus resulting from a market not being in competitive equilibrium -loss of total surplus that results from not selling all units where MB is greater than or equal to MC
area of triangle
1/2 X base X height
at equilibrium P* is
MB = MC - is allocatively efficient -there is no unit not sold where MB greater than or equal to MC
amount tax paid by producers on graph is
P*- Ps
amount tax paid by consumers on graph is
Pd - P*
amount of tax is what on a graph is
Pd - Ps
Pf > P*
Pf needs to be above market equilibrium price
surplus govt would have to buy up:
Pf(Qs - Qd) -very expensive
black market
a market in which buying and selling take place at prices that violate government price regulations
economic efficiency
a market outcome in which the 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
a competitive market is
a market with many buyers and sellers
if the price of a product was zero the consumer surplus in the market would be....
all of the area below the demand curve (when the price is not zero, it is the area below the demand curve and above the market price
if the producer could produce could supply a good or service at zero cost, the surplus would be..
all the area below the market price (when cost is not zero, the producer surplus is the area below the market price and above the supply curve)
the winners with rent control are the people who
are paying less for rent becuase they live in rent controlled apartments or the landlords who illegal rents their places for higher
tax causes a reduction in both
consumer and producers surplus
price ceilings - who benefits
consumers
the willingness to supply a product depends on the
cost of producing it
marginal benefit curve is which curve?
demand
cant compare surpluses across
different markets
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
equilibrium in a competitive market results in the economically...
efficient level of output, at which marginal benefit equals marginal cost
economic surplus is at a maximum when the market is in
equilibrium
rent control reduces economic efficiency because
fewer apts are rented than would be in a competitve market
farm program
government intervention in agriculture -(often results in large surpluses)
subsidies
government pays farmers cash payments
who pays more of the tax depends on
how sensitive they are to a price change
a tax is efficient if it
imposes a small excess burden relative to the tax revenue it raises
whenever the government taxes a good or service..
less of that good or service will be consumed
market price
minimum price required to sell
producer surplus measures the _____ benefit received by producers from participating in a market
net
consumer surplus measure the _____ benefit to consumers from participating in a market rather than the ______ benefit
net total
federal insurance contributions act is sometimes referred to as the
payroll tax
rent control is an example of
price ceiling
minimum wage is an example of
price floor
in markets for farm products such as milk, the govt has been setting ________ above equilibrium market price since the 1930s
price floors
price floors - who benefits
producers
productive efficiency
producing at lowest cost
when the government imposes a price ceiling or a price floor, the amount of economic surplus in a market is..
reduced (price ceillings and price floors reduce the total benefit to consumers and firms from buying and selling in the market
tax causes an increase in the cost of production which causes the supply curve to
shift to the left for a decrease in supply
marginal cost curve is which curve?
supply
tax incidence
the actual division of the burden of a tax between buyers and sellers in a market [rectangle of area with height P2-P* (consumer) and P*-P3(supplier, price pt on S1) and base Q2]
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
marginal cost
the additional cost to a firm or producing one more unit of a good or service
willingness to pay is the measure of
the benefit in money terms that the consumer receives by consuming that unit
the incidence of a tax does not depend on whether
the govt collects a tax from the buyers of a good or from a seller
losers from rent control are
the landlords of the rent controlled apts who abide by the law and renters who are unable to find apartments to rent at the controlled price
economic surplus
the sum of consumer surplus and producer surplus
with a shortage the market does not guarantee that buyers who
value the goods the most are able to buy them (because once cheaper, others will buy them even they dont need them)
positive analysis
what is
normative analysis
what should be
the burden of the FICA falls almost entirely on the
workers
