ECON Ch 4,10-11 Flashcards
Consumer surplus
The area below the demand curve, above the price, until the quantity
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays.
Efficient
Markets are efficient if they maximize the social surplus–> consumer + producer surplus
Also marginal benefit to consumers of the last unit produced is equal to the marginal cost of production.
Producer surplus
The area above the supply curve, until the quantity and below the price.
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.
Types of government intervention
Price controls –> price ceiling, price floor
Tax
Price ceiling
A legally determined maximum price that sellers can charge.
Prevents prices from climbing up.
Seem with rent control.
Price floor
A legally determined minimum price that sellers may receive.
Prevents prices from going down (labor market, agricultural market)
Price ceiling effect on price and quantity curve
Say that there is a rent control price ceiling–> without rent control the EQ rent is $1200 and 1000 units.
Now there’s a rent ceiling of $900, which would cause a quantity supplied of only 700 but demanded of 1500.
There is a shortage of 800 apartments, excess demand, making the market inefficient.
The new consumer surplus goes from the top left corner to the new price of $900 and the new quantity of 700. Looks like a trapezoid.
The new producer surplus is below $900 and until quantity of 700.
Deadweight loss is the middle triangle, lost area.
Producers lose, consumers gain. But the loss magnitude outweighs that of the gain.
Price floor impact on price and quantity / supply demand curves
Price floor prevents prices from going below a level.
Say the equilibrium price is $1 and equilibrium quantity is 5000 units of wheat.
Now we impose a price floor of $2, so the new quantity demanded is 4000 but quantity supplied is 6000. Excess supply.
New consumer surplus is smaller, above $2 and until 400
New producer surplus goes until 400 but up until $2. Trapezoid.
Middle triangle is DWL.
Deadweight loss
Disrupts economic efficiency.
The reduction in economic surplus resulting from a market not being in competitive equilibrium.
Amount of inefficiency. In competitive eq, dwl = 0
Area of the middle triangle when not in eq
How does DWL vary depending on where price floor/ceiling is
As P moves further away from P star, more DWL.
Taxation
Imposing a tax on the supplier at a per unit amount causes the supply curve to shift up by that amount (for example a $3 tax on supplier causes supply curve to go up by $3)
The new equilibrium point is where the demand curve intersects the new supply curve.
If the old eq price was $5 and now the new supply curve intersects the demand curve at $7, the consumer now pays $7. But $3 goes to the tax, so the supplier only gets $4.
The tax burden on the consumer is 7-2=5
Tax burden on producer is 4-5=1
On the graph, the CS is the top left triangle
The middle rectangle is tax revenue
Bottom left triangle is PS
and DWL is the middle triangle.
Elasticity and tax burden
If the demand is more inelastic, price doesn’t effect as much, so the steeper demand curve shows that the consumer pays more of the tax.
Whoever has more inelasicty pays more of the tax
Also, the DWL is bigger for more elastic, as price change influences more
DWL smaller for inelastic
Utility
The enjoyment or satisfaction you receive from consuming goods.
Marginal utility
The extra satisfaction you receive from consuming the next unit –> dimishing marginal returns, meaning less MU as you consume more.
Law of diminishing marginal utility
Principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time. MU decreasing, less additional utility as Q increases.
Conditions for maximizing utility
- Satisfy the rule of equal marginal utility per dollar spent –> MU/P should be equal for all the goods.
Always divide MU/$ and buy the good with the higher MU/$ always. - I spent all of my budget.
Assumes full rationality.
Technology
The processes a firm uses to turn inputs into outputs of goods and services.
Short run
In which at least one of the inputs is fixed.
Ex. A firm might have a long-term lease on a factory that is too costly to get out of
Long-run
Firms can vary all inputs, adopt new technology, and increase or decrease the size of its physical plant.
Variable costs
Costs that change as output changes.
Labor
Fixed costs
Costs that remain constant as output changes.
Ex. Pizza oven
Capital (K)
Total cost
The cost of all the inputs a firm uses in production.
Fixed cost + variable cost
Average total cost or average cost
Total cost / quantity
Total cost graph
Quantity on X axis
Doesn’t start at origin because of fixed cost when Q=0
Positive slope whole way, but positive slope increases as goes on.
Average total cost graph
U shaped.
Falling then rising.
Marginal product of labor
The additional output a firm produces as a result of hiring one more worker.
Quantity at one point - quantity at previous point.
Increases and then decreases because of law of diminishing returns.
When MPL is increasing, output is increasing at an increasing rate.
When MPL is decreasing, output is increasing at a decreasing rate.
Average product of labor
Total output / quantity of workers
Quantity pizza / quantity of labor.
Increases and then decreases.
Marginal cost
The change in total cost / change in quantity.
Relationship between MC and ATC
If MC > AC, then AC is increasing
If MC < AC, then AC is decreasing.
Marginal cost goes down slightly at first and then increases a lot whereas AC is u shaped. They intersect at the minimum of the AC!
AFC, AVC, ATC
AFC is the average fixed cost, FC / quantity of output produced.
AVC is the average variable cost, VC/ quantity of output produced.
ATC = AFC + AVC
AFC, AVC, ATC, MC graphs
ATC is u shaped.
MC goes down slightly at first and then way up
AVC approaches the ATC curve
AFC curve goes down to zero.
