HW 4 (Chapter 4)

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.

Price ceiling

a legally determine maximum price that sellers may charge

price floor

a legally determined minimum price that sellers may receive

deadweight loss

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

economic surplus

the sum of consumer surplus and producer surplus

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.

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 & E explanation: Consider the situation in which the price ​(P1​) 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 P1​, 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.

why is economic surplus an effective measure we have of the benefit to society from the production of a particular good or service?

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 surplus—which is the sum of the benefit to firms plus the benefit to consumers—is the best measure we have of the benefit to society from the production of a particular good or service.

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 surplus, A

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.

understanding economic surplus on a diagram

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.

price floor and price ceiling

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.

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

determining producer surplus

The willingness to supply a product depends on the cost of producing it. 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.

how to achieve economic efficiency in a market

To achieve economic efficiency in any​ market, the marginal benefit from the last unit sold should equal the marginal cost of production.

How do we measure consumer surplus in the market?

We can use the demand curve to measure the total consumer surplus in a market. Demand curves show the willingness of consumers to purchase a product at different prices. Consumers are willing to purchase a product up to the point where the marginal benefit of consuming a product is equal to its price. The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price.

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

which curve shows the marginal benefit received by consumers?

demand curve

What happens when the government imposes a price ceiling or a price floor?

imposing a price ceiling or a price floor will reduce the amount of economic surplus in the market

in the diagram, marginal benefit ____ marginal cost at output level Q1. The output level is considered economically ______

is greater than; inefficient

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.

which curve shows the marginal cost of production?

supply curve