Chapter 5 and 6 Flashcards
What is Willingness to pay (or reservation price)?
Willingness to pay is the maximum price a buyer will pay.
What is Willingness to sell?
Willingness to sell is the minimum price a seller is willing to accept in exchange for a good or service.
What is Consumer Surplus?
Refers to the difference between the maximum amount that consumers are willing to pay and the actual amount paid for all units of a product consumed.
Money saved from the difference between what consumers can afford and what they actually pay.
What is Marginal Benefit?
The maximum amount that consumers are willing to pay for a specified unit of quantity. It is the height of the demand curve at the specified unit of quantity.
What is Producer Surplus? In a chart it is the portion above supply curve (upward slope) and below the price line
The difference between the actual amount that producers receive for a product and the lowest amount that they would be prepared to accept for it.
What is Marginal Cost?
The minimum amount that firms must receive in order to supply a specified unit of quantity. It is the height of the supply curve at the specified unit of quantity.
What is Total surplus?
Total surplus is calculated by adding up consumer and producer surplus
What is Missing markets?
Inability to perform market transactions are missing opportunities for mutual benefit
Missing market - no place for potential buyers and sellers to exchange a particular good or service; quantity is below the equilibrium.
Example: When the production of a particular product is banned.
We can increase total surplus by creating new markets and improving existing ones, which has important implications for public policy
What is Efficiency?
Exists when market allocate resources in the production of goods and services that buyers value most highly.
When the consumer and producer surplus is maximized.
When the market is at equilibrium that is when supply and demand are equal.
When marginal benefit equals marginal cost
When there is no under or over production.
Note: Apart from the above situations the market is said to be inefficient.
What are Sources of inefficiency ?
Government intervention through price ceiling or price floor.
Taxes and Subsidies.
Monopoly.
Public goods.
External costs and benefits (Externalities).
What are Sources of inefficiency ? Pt. 2
Price ceiling (below equilibrium): max amount a seller can charge
Lower price means fewer producers willing to sell, causes producer surplus to fall
Total surplus falls as market loses equilibrium
When the price ceiling is set below the equilibrium price, the market forces are constrained by the price ceiling.
What are Sources of inefficiency ? Pt. 3 ceiling
Price ceiling (Above equilibrium)
The price ceiling set above the equilibrium price has no effect. The reason is that the market forces are not constrained by the price ceiling
If ceiling set above market equilibrium price it is non-binding
What are Sources of inefficiency ? Pt. 5
Price floor (above equilibrium): lowest legal price that can be paid
If the minimum wage is set above the equilibrium wage, there will be excess supply of labour
This will create unemployment.
It lowers consumer surplus and total surplus.
What are Sources of inefficiency ? Pt. 4 floor
Price floor (below equilibrium)
If the minimum wage is set below the equilibrium wage, the minimum wage has no effect.
The reason is that the market forces are not constrained by the minimum wage
Sources of inefficiency: Taxes
A tax causes deadweight loss.
Tax revenue is a tax burden to buyers and sellers.
Tax revenue is part of the loss in consumer and producer surplus but gain to the government.
