Economic efficiency, government price setting, and taxes - Chapter 4
If you have a lower market price, will it increase or decrease producer surplus?
A lower market price will decrease consumer surplus.
Black market
A market in which buying and selling take place at prices that violate government price regulations
What is an example of Consumer Surplus?
As you walk to the register, you think to yourself that the highest price you're willing to pay is $18 for a DVD, at the register you find out that the price is actually $12, so you buy the DVD. Your consumer surplus is $6.
To affect the market outcome, the government must set a price floor that is below the equilibrium price or set a price ceiling that is below the equilibrium price; otherwise the price ceiling or price floor will not be ______ on buyers and sellers.
BINDING
Black Market
Buying and selling take place at prices that violate government price regulations
Price Ceiling
CONSUMERS SUCCEED IN: A legally determined minimum price that sellers may charge.
Economic Surplus equation
Consumer surplus + Producer surplus
Price Floor
FIRMS SUCCEED IN: Legally determined minimum price that sellers may receive.
If you have a lower market price, will it increase or decrease consumer surplus?
Increase consumer surplus.
A tax is efficient if
It imposes a small excess burden relative to the tax revenue it raises.
Whenever a government taxes a good or service:
Less of that good or service will be produced and consumed
Consumers are willing to purchase a product up to the point where the _____ = ______
Marginal benefit = Price
In competitive equilibrium _____ = _____
Marginal cost equals Marginal benefit
Consumer surplus measures:
Measures the dollar benefit consumers receive from buying goods or services in a particular market
Producer surplus measures:
Measures the dollar benefit firms receive from selling goods or services in a particular market.
What are the 3 ways the government intervenes in markets?
Price floors, Taxes, Price ceilings
What is an example of a price ceiling?
Rent control
When the government imposes price floors or price ceilings, three important results occur:
Some people win Some people lose There is a loss of economic efficiency
Tax Incidence
The actual division of the burden of a tax between buyers and sellers in a market
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 of producing one more unit of a good or service
Consumer surplus
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
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.
How does price adjust in a competitive market?
The price adjusts to ensure that the quantity demanded equals the quantity supplied.
Deadweight Loss
The reduction in economic surplus resulting from a market not being in competitive equilibrium.
Firms will supply an additional unit of a product only if:
They receive a price equal to the additional cost of producing that unit.
The total amount of producer surplus in a market is equal
To the area above the market supply curve and below the market price.
Positive Analysis is concerned with
WHAT IS
Normative Analysis is concerned with
WHAT SHOULD BE
What does a black market result from
When governments try to control prices by setting price ceilings or price floors, buyers and sellers often find a way around the controls
The total amount of consumer surplus in a market is
equal to the area below the demand curve and above the market price
When the government imposes a price ceiling or a price floor, the amount of economic surplus in a market
is reduced.
Demand curve shows _____ received by consumers
marginal benefit
Supply curve shows _____
marginal cost
