Microecon chapter 5 Flashcards
Consumer surplus
Difference between consumer willingness to pay and what they actually pay
Producer surplus
Difference between producer willingness to supply and the price received
Consumer surplus on graph
Area above equilibrium and below the demand curve
Producer surplus on graph
Area above the supply curve and below the equilibrium
Total economic surplus on graph
Area above the supply curve and below the demand curve
Market failures (4)
- Price floor (min. price payable)
- Minimum wages
- Divots (max. quantity allowed)
- Taxes
Price floor
Minimum price
What does binding price floors lead to?
Excess supply
Binding minimum wages consequences (2)
- Reduction of employment levels
- Increases quantity supplied of labour services
Why are owners of firms are made worse off?
They are required to pay a higher wage before the imposition of minimum wage
Why do worker gain/lose
Some keep their jobs -> higher wage rate
Wage increase -> some lose their jobs
Price ceiling
Maximum price
What does price ceiling leads to?
Excess demand
Excess supply on graph
Above equilibrium
Excess demand on graph
Below equilibrium
What happens if the Xs supply is below the equilibrium or the Xs demand is above the equilibrium?
There is no change in the economy
Consequence of price ceiling
Hidden market (violate legal price control)
Goal of price ceiling (3)
- Restrict production
- Keep specific prices down
- Satisfy notion of equity in consumption of a product that is temporarily in short supply
Effects of rent control
- Quantity demanded exceeds quantity supplied
- Alternative allocation schemes
- Hidden market will appear
Existing tenant in rent control
Principal gainer from rent control
Landlords in rent control
Lose ( Do not receive expected returns)
Potential future tenant in rent control
Lose/suffer (Rental housing they require will not exist in the future)
Government solutions to housing shortage (2)
- Subsidize housing
- Produce public housing
Deadweight loss on graph
Area above supply curve and below demand curve between Q1 and Q0
Deadweight loss
Reduction in economic surplus caused by price floor/ceiling
Output quotas
Restriction of quantity produced
Biding output quotas consequence (2)
- Reduction in output and overall economic surplus
- Market price rises
Quota problems (3)
- Overproduction
- Costly barrier to entry
- Quota has market value
Why do government intervene if the outcome is inefficient
Helps a specific group of people
Policy makers do…
normative judgements
Economist do…
Positive analysis
