Chapter 9 Flashcards
producer surplus, welfare analysis, market distortions, internal trade
What is producer surplus?
the difference between the amount a good sells for (market price) and the minimum amount for sellers to be willing to produce (marginal cost)
What is deadweight loss?
The name for the ent reduction in welfare from the loss of surplus by one group that is not offset by a gain in another group
Why does competition maximize welfare?
Price equal marginal cost at competitive equilibrium
What impact does a sales tax have on prices with respect to firms and consumers?
Causes the price consumers pay to rise and the price firms receive to fall, decreasing both consumer and producer surplus
What is a price floor?
A minimum price a consumer can pay for a good
What distortions are created by price floors, creating dead weight loss (DWL)
- Excess production
- Inefficiency in consumption; willingness to pay > MC
What is a price ceiling?
is the highest price a firm can legally charge
When are price ceilings and price floors useless?
When equilibrium falls within in the range that is allowed by the restrictions
Price ceilings create what 2 things that may not be accounted for in deadweight loss?
- Consumers spend additional time searching
- Consumers who are lucky enough to buy may not be the consumers who value it most
Effects of import ban on surplus, government revenue (GR) , and dead weight loss (DWL)
A ban on imports reduces consumer surplus, increases producer surplus, no effect on GR, and creates DWL
What is a tariff? What are the two types?
A tariff is a tax on imports:
1. Specific tariff is a per unit tax
2. Ad valorem tariff is a percent of the sales price
Effects of tariffs on surplus, government revenue (GR) , and dead weight loss (DWL)
Reduces consumer surplus, increases supplier surplus, increases GR, and creates DWL
What is a quota?
a restriction on the amount of a good that can be imported
Effects of quotas on surplus, government revenue (GR) , and dead weight loss (DWL)
consumer surplus decreases, producer surplus increases, GR is not effected, and DWL is created
