ECON 102- CHAPTER 4 HOMEWORK

Economic efficiency is

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. Consumer surplus measures the benefit to consumers from buying a particular product. Producer surplus measures the benefit to firms from selling a particular product.​ Therefore, economic surpluslong dash—which is the sum of the benefit to firms plus the benefit to consumerslong dash—is the best measure we have of the benefit to society from the production of a particular good or service. This gives us a second way of characterizing the economic efficiency of 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.

In the​ diagram, marginal benefit ▼ marginal cost at output level Upper Q 3Q3. This output level is considered economically ▼

IS LESS THAN, INEFFICIENT. The demand curve shows the marginal benefit received by​ consumers, and the supply curve shows the marginal cost of production. To achieve economic efficiency in any​ market, the marginal benefit from the last unit sold should equal the marginal cost of production. The figure above shows that this equality occurs at competitive​ equilibrium, where quantity demanded equals quantity supplied at the market clearing price.​ Hence, marginal benefit equals marginal cost at this price and quantity combination. Equilibrium in a competitive market results in the economically efficient level of​ output, where marginal benefit equals marginal cost. OK

A price ceiling is a legally determined ----- price that sellers may charge. A price floor is a legally determined ------ price that sellers may receive.

MAXIMUM, MNIMUM. In​ equilibrium, every consumer willing to pay the market price is able to buy as much of the product as the consumer​ wants, and every firm willing to accept the market price can sell as much as it wants. Even​ so, consumers would naturally prefer to pay a lower​ price, and sellers would prefer to receive a higher price. Occasionally consumers succeed in having the government impose a price ceiling. Firms also sometimes succeed in having the government impose a price floor. Price ceiling A legally determined maximum price that sellers may charge. Price floor A legally determined minimum price that sellers may receive.

Consumer and producer surplus measure the​ _____ benefit rather than the​ _____ benefit.

NET; TOTAL. Consumer surplus measures the benefit to consumers from participating in a​ market, and producer surplus measures the benefit to producers from participating in a market. Consumer surplus in a market is equal to the total benefit received by consumers minus the total amount they must pay to buy the good. Producer surplus in a market is equal to the total amount firms receive from consumers minus the cost of producing the good. In a​ sense, then, consumer surplus and producer surplus measure the net benefit to consumers and producers from participating in a market rather than the total benefit.

----- surplus is the difference between the lowest price a firm would be willing to accept and the price it actually receives. This component of economic surplus is illustrated in the diagram by area ---- .

PRODUCER, B.

Every homework or study problem includes a set of learning aids positioned in the question help menu in the upper​ right-hand corner of the exercise​ window, although the learning aids available may vary from problem to problem. The eText learning aid will appear with every exercise. It will take you to the page of your textbook that covers the same material as the question​ you're working on. Try it now. Click the eText​ icon, read the definition of a shortage listed on that​ page, and then click the answers that correctly complete this​ statement: Complete the​ statement: right arrow→ A shortage is the amount by which the quantity demanded exceeds the quantity supplied.

QUANTITY DEMANDED--- QUANTITY SUPPLIED

When the government imposes price floors or price​ ceilings,

When the government imposes price floors or price​ ceilings, three important results​ occur: 1. Some people win. 2. Some people lose. 3. There is a loss of economic efficiency.

Tax incidence is

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

Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the​ diagram, deadweight loss is equal to the​ area(s):

C AND E. Consider the situation in which the price ​(P Subscript 1​) of a product is above the equilibrium​ price, as shown in the diagram above. At competitive​ equilibrium, consumer surplus is equal to the sum of areas​ A, B, and C. At the higher​ price, fewer units are​ sold, so consumer surplus declines to just the area of A. At competitive​ equilibrium, producer surplus is equal to the sum of areas D and E. At the higher price of P Subscript 1​, producer surplus changes to be equal to the sum of areas B and D. ​ \Notice that this is less than the original economic surplus by an amount equal to areas C and E. The reduction in economic surplus resulting from a market not being in competitive equilibrium is called the deadweight loss.

------ surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram by area ------ .

CONSUMER, A

BLACK MARKET

Black market A market in which buying and selling take place at prices that violate government price regulations.

"Rent controls, government farm​ programs, and other price ceilings and price floors are​ bad." This is an example of a

normative statement. The statement is concerned with what should be.

Economic surplus in a market is the sum of​ _____ surplus and​ _____ surplus. In a competitive​ market, with many buyers and sellers and no government​ restrictions, economic surplus is at a​ _____ when the market is in​ _____.

CONSUMER, PRODUCER, MAXIMUM, EQUILIBRIUM Economic surplus The sum of consumer surplus and producer surplus. In a competitive​ market, with many buyers and sellers and no government​ restrictions, economic surplus is at a maximum when the market is in equilibrium. To see​ this, let's look at the diagram above. The consumer surplus in this market is the blue area below the demand curve and above the line indicating the equilibrium price. The producer surplus is the red area above the supply curve and below the price line. The indicated areas are as large as they can be when the market reaches equilibrium.