Markets in action

Question 1

Define consumer surplus.

Answer 1

The difference between the amount customers would be willing to pay for a good or service and the amount they actually have to pay

Question 2

Define producer surplus.

Answer 2

The difference between the price producers actually receive for their goods and the price at which they are willing to sell them

Question 3

What part of the demand graph represents consumer surplus.

Answer 3

The area under the demand curve but above the equilbrium price (line)

Question 4

What part of the supply graph represents producer surplus.

Answer 4

The area above the supply curve but below the equilibrium price (line)

Question 5

Define a price ceiling.

Answer 5

A price ceiling is a price regulation that sets the highest price that can be paid legally for a good or service

Question 6

Give an example of a price ceiling.

Answer 6

Controlling rent

Question 7

What does a price ceiling cause to demand?

Answer 7

There will be excess demand, the quantity demanded exceeds the quantity supplied at that price and so a shortage

Question 8

Define excess demand when there is a price ceiling.

Answer 8

The difference between the quantity demanded and the quantity supplied at a price ceiling.

Question 9

What does a price ceiling cause to happen to the surpluses?

Answer 9

There is a transfer of surplus from producer surplus to consumer surplus and deadweight loss

Question 10

Define deadweight loss.

Answer 10

Deadweight loss in the reduction in total surplus that occurs as a result of a market inefficicency

Question 11

Draw the producer surplus, consumer surplus and deadweight loss on a supply demand model when there is a price ceiling imposed.

Answer 11

Picture

Question 12

What is the problem with deadweight loss?

Answer 12

It is a market inefficiency, it could of been gained by producers or consumers but instead it is lost so no one is benefitting from it

Question 13

How is deadweight loss and price elasticities related?

Answer 13

The more price elastic a good is , the greater the deadweight loss will be

Question 14

Define a nonbonding price ceiling.

Answer 14

A price ceiling set at a level above equilibrium price

Question 15

Why are price ceilings set above the equilibrium price non bonding?

Answer 15

There is no impact on price so no excess demand and no deadweight loss

Question 16

Define a price floor.

Answer 16

A price regulation that sets the lowest price that can be paid legally for a good or service

Question 17

Generally what does tax do to the supply and model model?

Answer 17

Drive a wedge between the price buyers pay and the price that producers actually receive which creates a second supply curve we have to keep track of

Question 18

On a supply demand model which sections represent government revenue?

Answer 18

The box drawn out from the price a consumer buys the product at and the price the consumer gets for selling the product

Question 19

When a tax is imposed which supply curve do the consumers and producers face?

Answer 19

The consumers care about the new, second one where as the producers only care about the initial one

Question 20

Why are producers only bothered about the initial curve when a tax is emplaced?

Answer 20

The curve shows the amount of a good they are willing to sell for a price, and the levels in this curve represent the after tax money they will be getting back

Question 21

Why does tax create a dead weight loss?

Answer 21

There are consumers and producers that would have traded the good with no tax on receiving surplus from it , however the tax prevents this and no one gains it and so it is lost

Question 22

Do bigger taxes create larger or smaller deadweight losses? And why?

Answer 22

More, there are more people who no longer take part in the market

Question 23

Define tax incidence.

Answer 23

Tax incidence is the person who actually pays a tax, bears the burden of it

Question 24

How does whether it is a production or sales tax change how tax effects the supply and demand model?

Answer 24

If it is a production tax it creates a second supply curve, where as if it is a sales tax it creates a second demand curve

Question 25

If there is relatively elastic demand and relatively inelastic supply how does this change the way the government tax?

Answer 25

This means the buyers are sensitive to price and the suppliers are not so it makes sense to tax the suppliers

Question 26

If there is relatively inelastic demand and relatively elastic supply how does this change the way the government tax?

Answer 26

This means the buyers are not sensitive to price and the suppliers are so it makes sense to tax the consumers

Question 27

What is the equation for the share of the tax borne by consumers?

Answer 27

Equation

Question 28

What is the equation for the share of the tax borne by producers?

Answer 28

Equation

Question 29

When will the consumers bear the whole burden of the tax?

Answer 29

When their price elasticity is equal to 1

Question 30

When will the consumers bear none of the burden of the tax?

Answer 30

When their price elasticity to infinite

Question 31

Define a quota.

Answer 31

A quota is a regulation that sets the quantity of a good or service provided

Question 32

Define a subsidy.

Answer 32

A subsidy is the payment by the government to a buyer or seller of a good or serivce

Question 33

Name four types of government intervention that contribute to deadweight loss.

Answer 33

1. ) Price ceiling/floors
2. ) Quotas
3. ) Government subsidies
4. ) Taxes