Module 10 Flashcards
What is economic surplus?
The NET dollar benefit from interacting in the market.
What is the total economic surplus?
Consumer surplus + producer surplus.
How do we calculate consumer surplus in a perfectly competitive market?
= [highest price they would have paid - P(equilibrium)] * Q (eq.) * 0.5
Why is consumer and producer surplus considered “net”?
Because the price is not zero for consumers and cost is not zero for producers.
Does producer surplus take fixed costs into account?
No
What are the two equations for producer surplus?
a) = revenue - VC
b) = [P(eq.) - P(lowest acceptable)] * Q(eq.) * 0.5
Which market types give us dead weight loss?
Anything where MR < D.
What do consumer and producer surpluses look like in a monopoly or monopolistic competition?
Consumer: Pmax to Pmonopoly * Q * 0.5
Producer: [(MC-Pmin) * Q * 0.5] + [(Pmonopoly-MC) * Q]
DWL: area between (P & Qmonopoly) & (MC=D)
Is there deadweight loss with first degree price discrimination?
No
What is the consumer surplus under perfect price discrimination?
Zero - it all goes to the producer.
What happens to economic surplus when there’s a price floor? What happens to the amount of product in the market?
Consumer: looses area A to producers, area B to deadweight loss.
Producer: looses area C to deadweight loss, gains area A.
DWL: Areas B & C (from decreased demand).
Product: There will be a surplus (S>D)
How do we calculate the amount of consumer surplus transferred to producers with a price floor?
[P(floor) - P(eq.)] * Q(floor)
How do we calculate producer surplus with a price floor?
Normal Producer surplus - (0.5 * DWL) + Transferred Consumer Surplus
How do we calculate consumer surplus with a price ceiling?
((max price they would have paid - price they’d normally pay at Qprice ceiling) * Qprice ceiling * 0.5)+((Price they’d normally pay at Qprice ceiling - Pprice ceiling) * Qprice ceiling)
What happens to the amount of product in the market with a price ceiling?
We get a shortage.
What does “scarce” mean?
It just means the supply is not infinite. This does not mean a shortage.
What is the illicit market price of a good when there’s a price ceiling on it?
Where Qprice ceiling = D
What happens to the market price including the illicit market price if there’s an easy way to get around a price ceiling?
Price will return to equilibrium.
Do taxes move the Supply or Demand curve?
Whoever the tax is applied to is moved.
What is tax incidence?
Who actually ends up paying the cost as opposed to remitting the tax.
What is the criteria for a tax to be considered efficient?
- The DWL < Tax Revenue
- Compare it to other taxes for DWL vs revenue
How do we know how far to move the supply curve with a tax applied to sellers?
Apply it where the curves cross the y-axis, then you’ll find out who the tax actually falls on.
What does a tax look like when supply is perfectly elastic?
The consumers pay all of it.
How do we calculate Producer and Consumer Surplus with a tax on producers?
CS: use new S curve
PS: use old S curve
Tax: area between the two S curves
DWL: between the two S curves
Who pays a tax on suppliers when demand is perfectly elastic? Perfectly inelastic?
Perfectly Elastic Demand: producer pays
Perfectly Inelastic Demand: consumer pays
How do we draw the demand curve shift for a tax on consumers?
Start the measurement of the tax at the upper end of the y-axis.
How do we know how much a tax is?
Don’t look in the centre if supply has shifted - look at the y-intercept.
What is the true tax burden?
Consumer share + Producer share + DWL
