Micro 8 - Consumer and Producer Surplus And Allocative Efficiency Flashcards
Consumer Surplus- definition
> The difference between the total amount that consumers are willing and able to pay for a good or service and the total paid at market price.
Producer Surplus - definition
The difference between the total amount producers are willing and able to receive for production of a good or service and total amount paid at market price.
Net welfare gain - definition
Utility or welfare that is gained when output moves towards the socially optimal level of output.
Dead weight loss- definition
> The shortfall in total surplus welfare when the market isn’t operating at the socially optimal level of output.
This is net utility or welfare that could be enjoyed by producers and consumers but which is being ‘lost’ from under-consumption or the net cost of overconsumption.
Socially optimal level of output - definition
The level of output for an industry that maximises net welfare for society
What does the supply curve represent?
Marginal cost of each extra unit produced.
Allocative efficiency definition
> The point at which the value placed on a good, I.e the price, coincides with the value of the resources used to make it.
Conditions for AE: P=MC, AR=MC.
Productive efficiency definition
> Where production takes place using the least amount of scarce resources.
Optimal output for minimal costs.
Conditions for PE: MC = AC.
Condition for profit maximisation
MR = MC.
Profit maximisation
> A firm that aims to maximise profits doesn’t achieve AE or PE in the short-run.
However, in the long run, if the profit is reinvested the firm could achieve dynamic efficiency.
Static and dynamic efficiency
> Static efficiency is efficiency in the short run where costs, supply and demand are fixed at different levels.
In contrast, dynamic efficiency considers efficiency in the long run, allowing for changes to costs of production due to improved production techniques and technology.
While in the short run, a firm that maximises profits isn’t AE or PE, the profits the firm makes can be reinvested to help the firm achieve dynamic efficiency.
Effect of investment in improving technology
Increases productivity = lowers AC = shifts supply curve out = increases producer and Consumer Surplus.
Effect of staff training courses
Improves skills = increases labour productivity = improves efficiency = lowers AC = shifts supply curve outwards, increasing C + P surplus.
What are crucial in the short run?
Supernormal profits are crucial so firms can become AE and PE.
Consumer surplus area
> Area below demand curve and above equilibrium price line.
