Chapter 3 Flashcards
Where can we find consumer surplus on the demand and supply graph?
We can find it in the area beneath the demand curve and above the supply curve, above the market price
What does consumer surplus measure?
It measures the total benefit to all consumers
What does producer surplus measure?
It measures the welfare benefit of a competitive market
Where is the producer surplus found?
It is found in the area beneath bot the demand curve and the market price and above the surplus curve
What is deadweight loss?
It is the cost created by society due to market inefficiency which occurs when demand and supply are not at equilibrium
What is market failure?
It is when an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers
What are the two main reasons why market failure may occur?
Externalities
Lack of Information
What is an externality?
An externality is an action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price
What are some other reasons that market failure might occur?
Lack of information (consumers won’t be able to make the utility-maximizing purchasing decisions necessary for the market to succeed)
Government intervention
What is the price minimum?
It is when the price is regulated to be no lower than a given price
What is the minimum wage?
It is when firms are not allowed to make the wage any less than a given price
What are price supports?
They are prices set by the government above the free-market level and maintained by governmental purchases of excess supply
What is the equation for total change in consumer surplus?
ΔCS = -A - B
What is the equation for total change in producer surplus?
ΔPS = A + B + D
What is the equation for the cost to the government?
(Q2-Q1) x Ps
What is the equation for total change in welfare?
ΔCS + ΔΔP - Cost to Govt. = D - (Q2-Q1) x Ps
What are supply restrictions?
It is when supply is restricted by either a) imposing production quotas or b) giving producers a financial incentive to reduce output
What is an import quota?
It is the limit on the quantity of a good that can be imported
What is a tariff?
It is a tax on an imported good
What is the impact of tax on inelastic demand relative to supply?
The burden of the tax mostly falls on buyers
What is the impact of tax on elastic demand relative to supply?
The tax falls mostly on sellers
What is a specific tax?
It is a tex of a certain amount of money per unit sold
What is a subsidy?
It is a payment that reduces the buyer’s price below the seller’s price
