Lecture 5 - Economic Efficiency, Government Price Setting, and Taxes Flashcards
Consumer Surplus
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays; net benefit to consumers from participating in a market
Reservation Price
The highest price a consumer is willing to pay for a good or service
Marginal Benefit
The additional benefit to a consumer from consuming one more unit of a good or service
The demand curve is also called the
marginal benefit curve
What area on a graph represents the consumer surplus?
The area under the demand curve and above the price
Producer Surplus
The difference between the lowest price a firm is willing and able to accept for a good or service and the price it actually receives
What is the lowest price a firm is willing to accept for a good or service?
Marginal cost
Marginal Cost
The additional cost to a firm of producing one more unit of a good or service
Producer Surplus is equal to
Total amount firms receive from consumers minus the cost of producing the good or service
Consumer Surplus is equal to
The total benefit received by consumers minus the amount they must pay to purchase a good or service
The supply curve is sometimes called the
Marginal Cost curve
What area on the graph represents the Producer Surplus?
The area above the supply curve and below the price
Economic surplus
The sum of producer and consumer surpluses
Allocative Efficiency
Marginal benefit to consumers is equal to the marginal cost of producing
When is economic surplus maximized?
When a market is allocatively efficient
What happens in competitive equilibrium?
Marginal benefit is equal to marginal cost
Deadweight Loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium; a measure of inefficiency
Price Ceiling
A legally determined maximum price that a firm may charge for a good or service
What is an example of a price ceiling?
Rent Control
Price Floor
A legally determined minimum price that a firm may charge for a good or service
What are two examples of a price floor?
Minimum Wage, Agricultural Price Supports
Black Market
A market in which buying and selling takes place at prices that violates government price regulations
True or False: Economic Efficiency suffers due to price controls
True
What is the motivation for levying a tax?
Increase governmental revenue which increases the provision of governmentallly supplied goods and services
