Consumer, Producer, and Community Surplus

Question 1

Consumer Surplus

Answer 1

the extra amount of money consumers are prepared to pay for a good or service in excess of the amount they paid for it

Question 2

What does CS measure

Answer 2

consumer welfare (utility) derived from consuming goods and services

Question 3

Producer surplus

Answer 3

excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output

Question 4

Community Surplus

Answer 4

the total consumer and producer surplus added together, indicating the total welfare in the market

Question 5

What is the Iron Law of Demand

Answer 5

When the price of a product rises, market demand will ALWAYS fall; when the price of a product falls, market demand will ALWAYS rise

Question 6

Price Elasticity of Demand

Answer 6

measurement of how much demand changes AFTER a change in price

Question 7

Characteristics of Inelastic Demand

Answer 7

very few substitutes, necessity, a product that costs only a small proportion of a consumer’s income, an addictive product

Question 8

Characteristics of Elastic Demand

Answer 8

lots of substitutes, luxury, a product that costs a large proportion of a consumer’s income, a non-addictive product

Question 9

PED calculation significance

Answer 9

tells us whether a product has elastic or inelastic demand

Question 10

PED value formula

Answer 10

Percent change in quantity demanded/ percentage change in price

Question 11

revenue (turnover or income of a firm)

Answer 11

money received from selling a good or service !different than profit!

Question 12

what is a perfectly inelastic PED value

Answer 12

0

Question 13

what is a perfectly elastic value

Answer 13

-inf

Question 14

what is a unit elastic PED value

Answer 14

-1

Question 15

Describe the Shift Out in Demand of hamsters

Answer 15

Demand for hamsters shifts out due to Christmas. There is more demand than before (q1) but the supply is the same at q1). There is excess demand, a problem for consumers in getting hamsters. Some consumers leave the market and may switch to substitutes. Other are prepared to pay more to get hamsters, which signals to firms that increasing supply gets a higher price. Seeing the chance of more profit, firms supply more to get a higher price.

Question 16

Demand

Answer 16

the amount of a good or service consumers wish to buy and can afford to purchase at a certain price

Question 17

What a
ffects Demand

Answer 17

Price factor (aka the price of the good or service itself)
Non-price factors (aka other factors that affect the demand ex. substitutes)

Question 18

What factors cause a movement along the demand curve (contraction, extension)

Answer 18

change in the price of a good or service

Question 19

what causes a shift of the demand curve to the right or left

Answer 19

non price determinant factors

Question 20

what are the non price determinant factors

Answer 20

1. real income - normal and inferior goods (generic vs. mainstream brand)
2. price of related goods - substitutes and complements
3. tastes and preferences - when taste changes in favor of a given product demand will increase for that product
4. future price expectations - if people think the price will increase in the future, they will purchase rn, otherwise they will wait to purchase later
5. number of consumers - if theres an increase in number of consumers for a product, demand curve shifts right

Question 21

supply

Answer 21

the quantity of a good or service that producers are willing and able to supply at different prices in a given time period

Question 22

Law of Supply

Answer 22

as the price of a product rises, the quantity supplied of the product will usually increase

Question 23

what are the non-price determinants of supply

Answer 23

1. cost of factors of production - e.g. increase in price of sugar for muffins causes shift left in supply curve
2. price of related goods - competitive and joint supply
   competitive = if one item produced is more profitable, firms will increase supply of it and decrease supply of another
   joint = if two goods are produced at the same time and demand for one of the item goes up, the demand for the other item inevitably also goes up
3. government intervention - indirect taxes and subsidies
   taxes on goods and services are added to the price of a product - increases cost of production
   subsidies = payments made by gov’ts that will reduce the cop
4. expectations about future prices - may withhold supply if they believe they can supply more in the future to gain from higher prices
5. changes in technology - improvements in capital lead to an increase in supply

Question 24

what is a substitute

Answer 24

two alternative goods that could be used for the same purpose that are in competitive demand

Question 25

what is a complement

Answer 25

goods and products frequently purchased together; the change in price of one of the products will lead to a change in the demand for the other product e.g. coffee and donuts

Question 26

what PED values are inelastic

Answer 26

between 0 and 1

Question 27

what PED values are elastic

Answer 27

anything greater than 1

Question 28

what is unit elastic demand

Answer 28

value of PED is equal to 1, a change in the price of the product results in a proportionate, opposite, change in the quantity demanded

Question 29

allocatively efficient

Answer 29

when a market is in equilibrium with no external influences and no external effects

Question 30

describe what occurs when the demand curve shifts from D to D1

Answer 30

price initially remains at Px so we find that Qx continues to be supplied, but demand now increases to Q2. This means that at the original equilibrium price, there is an excess demand. In order to eliminate the excess demand, it is necessary for price to rise until the quantity demanded equals the quantity supplied. Thus, price will rise until it reaches Px1, the new equilibrium price,where Qx1, the new equilibrium quantity, is both supplied and demanded