Module 5 Study Guide Flashcards
What are marginal benefit and marginal cost? How do they relate to demand and supply?
Marginal benefit of consuming or purchasing more of a product is determined by how much you’d be willing to pay for more of that product. For example, you may be willing to pay $3 for a bagel but only willing to pay $2 for a second bagel. The marginal benefit of a second bagel would then be $2 instead of $3. You may only be willing to pay $1 for a 3rd bagel in which case the marginal benefit of the third bagel would be $1. Benefit is only used to describe the first unit of a certain product. Marginal benefit is used to describe each additional unit. (Called willingness to pay and synonymous with the demand curve) The demand curve and the marginal benefit curve are the same thing. The total benefit is the entire bottom of the demand curve.
Marginal cost is the minimum amount the producer can sell a product for to still bring it to the market. It’s the price that a producer is willing to accept for their product. For example, they may only be willing to sell a bagel to someone if they’re going to get at least $0.50 for that bagel.
Explain market efficiency using marginal benefit and marginal cost.
The intersection of marginal benefit and marginal cost is where market efficiency is achieved. When the marginal cost is greater than the marginal benefit, you should create less. On the other hand, if the marginal cost is less than the marginal benefit, you should create more to reach market efficiency in order to not leave money on the table.
Describe consumer and producer surplus. Draw a graph and use it to identify consumer and producer surplus
consumer surplus: the difference between what a consumer is willing to pay (marginal benefit curve) and what they actually pay (everything in between what you pay and what you’re willing to pay is the consumer surplus or the extra money you get to keep basically)
producer surplus: the difference between what a producer is willing to accept and what they actually receive in the market (difference between what the producer is willing to accept or the supply curve and the price that the producer actually receives) (can be found between the supply curve and the actual price)
What is a social (total) surplus?
The social (total) surplus is the producer surplus and the consumer surplus together
Give an example of a price ceiling. Explain its effect on consumer surplus, producer surplus, and quantity using a graph.
A price ceiling is a maximum government mandated price that the producers cannot charge above.
When the government steps in and put a price ceiling in place they’re doing so because they’re trying to make the good or service more affordable for more people.
A price ceiling is a price that is always below equilibrium.
An example is rent control.
My teacher is saying this (paraphrased):
Price ceilings do not work because when the price of the item is at a price lower than equilibrium, like the graph shows, the producers are willing to bring less product to the marketplace. But on the consumer side, when the price is that low then people want more of it than at equilibrium. So you can see that a price ceiling creates a situation where the quantity demanded is greater than the quantity supplied. When you have too much demand and not enough supply, you have a market shortage. So price ceilings, even though they are intended to help to consumers, they actually cause harm because we’re going to see a loss of social surplus. (I can’t believe I’m being taught that price ceilings are just always blanket bad for consumers as a fact in a class– I’m truly mortified.)
So then the DWL is the social surplus lost from producers and consumers combined while a portion of the producers surplus previously now goes to consumers (basically replacing what the consumers lost and the producers lose a lot) because producer surplus is only the difference between the supply curve and what the suppliers actually get to receive in the market.
Give an example of a price floor. Explain its effect on consumer surplus, producer surplus, and quantity using a graph.
A price floor is always above equilibrium. It’s a minimum price that will be charged in the marketplace. The price cannot go below the floor, so the price floor becomes the minimum price in the market. At this price floor, the quantity supplied is greater than the quantity demanded. This results in surplus. Consumer surplus becomes really tiny with a price floor.
