LS13 and 14 Flashcards
What is consumer surplus?
The extra amount of money consumers are prepared to pay for a good or service above the actual price
Top triangle
What is producer surplus?
The extra amount of money paid to producers above what they are willing to accept to supply a good or service
Bottom triangle
How do you calculate the unit rate of tax?
Vertical distance between 2 supply curves
How do shifts in the supply and demand curve affect consumer and producer surplus?
A shift of the supply curve up increases producer surplus and decreases consumer surplus
A shift of the demand curve left increases consumer surplus and decreases producer surplus
What is an indirect tax? What does it cause?
A tax levied on a good to reduce demand for it.
The incidence of an indirect tax causes supply curve to shift left. The burden on this depends on the elasticity of demand a supply
What does indirect tax do if demand is price elastic?
Burden falls mainly on producers
What does indirect tax do if demand is price inelastic?
The burden falls mostly on the consumer
What are subsidies? What do they cause?
They are given by a government to a firm to make a good easier to produce and to encourage production
They cause the supply curve to shift right
What is the incidence of a subsidy?
Refers to how the gains of the subsidy are distributed between consumers and producers
What happens when demand is price is elastic(subsidy)
Gain goes to producers
The more elastic a curve is, the greater the producer gain
What happens when demand is price is inelastic(subsidy)?
Gain goes to consumers
The more inelastic a curve is, the greater the consumer gain
What is the formula for government spending?
Subsidy rate x quantity sold
What is the income effect?
Assuming a fixed level of income, as price falls the amount that a consumer can afford increases so demand increases
What is marginal utility?
The utility or satisfaction gained from consuming 1 extra unit of good or service
What is diminishing marginal utility?
The marginal utility gained from consuming each extra unit of good will fall the more you consumer
