5b. Competition Maximizes Welfare Flashcards

1
Q

What is “Consumer Welfare”?

A

“Consumer welfare from a good is the benefit a consumer gets from consuming that goods MINUS what the consumer paid to buy the good.”

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2
Q

What is “Consumer Surplus”?

A

The monetary difference between what a consumer is willing to pay for the quantity of the good purchased and what the good actually costs is called consumer surplus (CS).

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3
Q

How is “consumer surplus” shown on a DIG?

A

Below Demand curve, above equilibrium price

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4
Q

What is “Producer Surplus”?

A

“the difference between the amount for which a good sells and the minimum amount necessary for the seller to be willing to produce the good”

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5
Q

How is “producer surplus” shown on a DIG?

A

Above the supply curve, below the price

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6
Q

What is the equation of “welfare”?

A

Define Welfare as W= PS+CS

-> SUM of consumer surplus and produces surplus

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7
Q

What does the perfect competition equilibrium do to welfare?

A

Perfect Competition equilibrium q* (where Demand=Supply) maximizes W

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8
Q

What is the “deadweight loss”?

A

net reduction in welfare from the loss of surplus by one group that is not offset by a gain to another group.

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9
Q

What is the “deadweight loss” in this example?

A

area C + E

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10
Q

What is pareto efficiency?

A

“When no one can be made better off without making someone else worse off.”

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11
Q

Why are too many trades bad for welfare?

A

Bad for welfare…
The cost of producing the extra unit of output exceeds the value consumers place on it

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12
Q

What are some examples of government policies to move an economy away from the competitive equilibrium?

A
  • Restricting the number of firms or quota on production/consumption
  • Raising entry and exit costs
  • Introducing Sales Taxes
  • Price Floor and Price Ceiling
  • Tariff/Quotas
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13
Q

How does a “sales tax” affect welfare?

A

DWL is created (area C + E),

Tax lowers output from the competitive level where welfare is MAXIMISED.

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14
Q

The subsidy is on a DIG the opposite of?

A

The opposite of a sales tax!

Instead of shifting demand inwards, a subsidy will shift demand outwards.

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15
Q

What is a “price floor”?

A

In some markets, the government sets a price floor , or minimum price, which is the lowest price a consumer can pay legally for the good.

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16
Q

What are the impacts of a price floor?

A

If the market price is above p, the support program is irrelevant.

If the market price would be below p , however, the government buys as much output as necessary to drive the price up to p.

17
Q

What is a “price ceiling”?

A

In some markets, the government sets a price ceiling : the highest price that a firm can legally charge.

18
Q

Impact of price ceiling

A

As a result of the price ceiling, consumers buy the good at a lower price but are limited by sellers as to how much they can buy. Because less is sold than at the precontrol equilibrium, society suffers a deadweight loss: Consumers value the good more than the marginal cost of producing extra units.