Markets in action Flashcards
Define consumer surplus.
The difference between the amount customers would be willing to pay for a good or service and the amount they actually have to pay
Define producer surplus.
The difference between the price producers actually receive for their goods and the price at which they are willing to sell them
What part of the demand graph represents consumer surplus.
The area under the demand curve but above the equilbrium price (line)
What part of the supply graph represents producer surplus.
The area above the supply curve but below the equilibrium price (line)
Define a price ceiling.
A price ceiling is a price regulation that sets the highest price that can be paid legally for a good or service
Give an example of a price ceiling.
Controlling rent
What does a price ceiling cause to demand?
There will be excess demand, the quantity demanded exceeds the quantity supplied at that price and so a shortage
Define excess demand when there is a price ceiling.
The difference between the quantity demanded and the quantity supplied at a price ceiling.
What does a price ceiling cause to happen to the surpluses?
There is a transfer of surplus from producer surplus to consumer surplus and deadweight loss
Define deadweight loss.
Deadweight loss in the reduction in total surplus that occurs as a result of a market inefficicency
Draw the producer surplus, consumer surplus and deadweight loss on a supply demand model when there is a price ceiling imposed.
Picture
What is the problem with deadweight loss?
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
How is deadweight loss and price elasticities related?
The more price elastic a good is , the greater the deadweight loss will be
Define a nonbonding price ceiling.
A price ceiling set at a level above equilibrium price
Why are price ceilings set above the equilibrium price non bonding?
There is no impact on price so no excess demand and no deadweight loss
Define a price floor.
A price regulation that sets the lowest price that can be paid legally for a good or service
Generally what does tax do to the supply and model model?
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
On a supply demand model which sections represent government revenue?
The box drawn out from the price a consumer buys the product at and the price the consumer gets for selling the product
When a tax is imposed which supply curve do the consumers and producers face?
The consumers care about the new, second one where as the producers only care about the initial one
Why are producers only bothered about the initial curve when a tax is emplaced?
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
Why does tax create a dead weight loss?
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
Do bigger taxes create larger or smaller deadweight losses? And why?
More, there are more people who no longer take part in the market
Define tax incidence.
Tax incidence is the person who actually pays a tax, bears the burden of it
How does whether it is a production or sales tax change how tax effects the supply and demand model?
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
If there is relatively elastic demand and relatively inelastic supply how does this change the way the government tax?
This means the buyers are sensitive to price and the suppliers are not so it makes sense to tax the suppliers
If there is relatively inelastic demand and relatively elastic supply how does this change the way the government tax?
This means the buyers are not sensitive to price and the suppliers are so it makes sense to tax the consumers
What is the equation for the share of the tax borne by consumers?
Equation
What is the equation for the share of the tax borne by producers?
Equation
When will the consumers bear the whole burden of the tax?
When their price elasticity is equal to 1
When will the consumers bear none of the burden of the tax?
When their price elasticity to infinite
Define a quota.
A quota is a regulation that sets the quantity of a good or service provided
Define a subsidy.
A subsidy is the payment by the government to a buyer or seller of a good or serivce
Name four types of government intervention that contribute to deadweight loss.
- ) Price ceiling/floors
- ) Quotas
- ) Government subsidies
- ) Taxes
