Market Efficiency - Chapter 4 (J) Flashcards
efficiency is the economy…
getting the most out of its scarce resources
efficiency means producing…
goods that society wants at the lowest possible cost
microeconomics is
concerned with the efficient allocation of scarce resources
the demand curve reflects your
willingness to pay (the maximum price that a person is willing to pay for a good)
two types of efficiency
- productive or technical efficiency
- allocative efficiency
productive or technial effeciency
is production being done at lowest unit cost so there is no waste
allocative efficiency
are resources being used to make products that people want
consumer surplus
the difference between an items total value or total value received to consumers, and the actual price they pay for it
when does consumer surplus occur
when the marginal benefit is more than the marginal cost
consumer surplus example. Budget of $10,000 for dream car, they find perfect one for $6000. what is consumer surplus
$4000. saves that much
producer surplus
the price of a good minus the marginal cost of producing it. (how much good is for sale for - how much it cost to make)
when does producer surplus occur
when producers sell a product for more than their marginal cost.
producer surplus example. It cost $2 to make a pair of socks and producers are selling them for $6. what is producer surplus
$4. if consumers are willing to pay 6 when it cost 2 to make producer surplus is 4.
total surplus formula
consumer surplus + producer surplus
when does total surplus occur when the market is efficient
at equilibrium
deadweight loss
a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium
deadweight loss means there is either
an underproduction or overproduction, prices are set below or above equilibrium
deadweight loss is the decrease in
total surplus that results in an inefficient allocation of resources
price controls
government regulated prices that set prices either above or below the equilibrium price
price ceiling
a legislated maximum price that sellers are not allowed to charge more than in the market
price celing helps
consumers
price ceiling creates deadweight loss because it causes
shortages
price ceiling model
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price floor
a legislated minimum price that sellers are not allowed to charge less than in the market
price floor helps
producers
price floor creates deadweight loss because it causes
surpluses
price floor model
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what is a tax
money paid by people or businesses to the government with the purpose of raising revenue for government spending programs.
effects of tax on a market
a tax causes the market price to increase and quantity to fall. the market is smaller so some products or services are not made even though market value is higher than cost. it is inefficient
welfare after tax
consumer surplus: smaller
producer surplus: smaller
overall: smaller welfare
tax: model example
If pre tax price is $50, after tax:
consumers pay $60
producers charge $40
so both consumers and producers are losing $10
if pre tax quantity is 100:
after tax it is 80
20 less consumers get products
producers are losing 20 lots of orders
{example is if unitary elastic}
burden of the tax
split between buyers and sellers
if inelastic: buyers carry more burden
if unit elastic: even split
if elastic: sellers carry more burden
what items are likely to be taxed
cigarettes, so less people buy them as bad for everyones health
alcohol, to stop addictions
gambling, to stop addictions
what is a subsidy
a grant paid to a producer (by government) with the purpose of reducing costs and increasing output
effects of subsidy on market
a subsidy causes the market price to decrease and quantity to rise. the market size is bigger so too many goods and services are being made, the cost of the subsidy is bigger than the benefits to producers and consumers so it is inefficient.
welfare after subsidy
consumer surplus: bigger
producer surplus: bigger
overall: bigger welfare
what items are likely to be subsidised
school, so more people can go
hospitals, so more people can get help
public food services, so more people can eat
vertical equity
people with a greater ability to pay taxes should pay more (eg $100,000 salary get taxed more than $60,000)
horizontal equity
people with a similar ability to pay taxes should pay the same or similar amounts (same jobs pay same taxes)
