Economics Topic 4 - Market Efficiency Flashcards
What is Consumer Surplus?
The difference between what a consumer is prepared to pay and what they actually pay in a market (area below demand curve and above price line)
What is Marginal Cost and Marginal Benefit?
Marginal Benefit: Extra benefit from consuming one extra unit of the good or service
Marginal Cost: Extra opportunity cost of producing one more unit of a good or service
What is Producer Surplus?
The difference between what a producer is willing to receive and what they actually receive in the market
What is the marginal cost curve
**Extra opportunity cost of producing one more unit of a good or service (area above supply curve and below price line)
What is total surplus?
Measures net benefit to society from the production and consumption of the good
o Maximised at equilibrium
o CS + PS = TS –> allocative efficiency is achieved
What is deadweight loss
Loss in total surplus that is avoidable –> allocative inefficiency is achieved
What is a price ceiling
The Highest price that a producer can charge on a good (mandated by government)
o Usually below the equilibrium price
o Intended to keep prices affordable for majority of the population
What are the impacts of price ceilings
o Needs for rationing process to regulate demand
o Could lead to black markets
Sellers lose as they sell less petrol and sell at a lower pricex
What is a price floor and its impact
Government mandated minimum price that a producer can charge on a good
o Usually above equilibrium price
o Designed to ensure there is a minimum income received by producers
Impact of Price Floors:
o Informal illegal markets could result e.g. Where workers are paid less than the minimum wage
What are the types of tax
Direct Tax: e.g. Income tax
Indirect tax:
o Consumers do not pay the tax directly but are affected through the changes in the price of goods and services
Specific tax: Tax is a fixed amount or is a set sum or money per unit
Ad Valorem tax: Where tax is a percentage of the value of the transaction e.g. GST
Why is there tax
- Aids in redistribution of income
- Corrects externalities
- Earns revenue
What is the impact of tax
o Reduces quantity while increasing price
o Tax incidence depends on the elasticity of the g/s
o Creates DWL
What are subsidies
- Payment by government to a firm to reduce production costs and increase output
- like a negative tax
- Aim: To encourage production of goods with positive externalities and to allow the producer to export more and aid in the expansion of the firm
Impact of Subsidies
DWL as part of gov. Expenditure on the subsidy is not translated into either consumer or producer surplus
What is economic efficiency
Producing goods that society wants at the lowest possible cost
How will producer and consumer surplus increase or decrease as market prices change
If market prices rise then producer surplus will increase as producers will supply more at a higher price. Their economic welfare will increase. (Changes in producer surplus are a better measure than changes in total revenue).
If market prices fall then consumer surplus will increase as consumers will buy more at a lower price. Their economic welfare will increase
When does economic efficiency occur.
Economic efficiency occurs when total surplus is at a maximum. Total surplus is only maximised at equilibrium
What is total surplus equal to
Total Surplus = Consumer Surplus + Producer Surplus
What are government policies that reduce efficiency
- Market restrictions
- Price controls
- Taxes on goods and services
- Subsidies paid to certain industries
- Externalities
What is price discrimination?
When firms charge different prices to different buyers for the same good/service to maximise revenue
