Topic 4: Market Efficiency Flashcards
What is market effeciency?
Efficiency means producing goods that society wants/desires, at the lowest, possible cost
Define consumer surplus
Differences between what consumer is prepared to pay and what they actually pay
Define producer surplus
Difference between what a produver is willing to receive (minimum supply price or cost of production) and what they actually receive
Define Total surplus
A measure of net benefits to society from the production and consumption of a good.
- Ts = consumer + Producer surplus
- Ts = Total benefits - total costs
- Maximised at equilibrium
Define Deadweight loss
The avoidable decrease in total surplus because something has prevented the market from producing the optimal output
Why do governments impose taxes?
Governments levy taxes on goods and services inorder to raise revenue for government spending
Market efficiency in a competitive market
Market effieciency in a perfectly competitive market refers to a situation where resources are allocated in the most optimal way:
- Many buyers and sellers
- Homogenous products
- No barriers to entry
What are the effects of a tax on a market?
Consumers worse off because they must now pay a higher price and consumer a lower quantity
- Consumer surplus decreases
Producers are worse off because they receive a lower price and sell less
- Producer surplus decreases
- Government uses tax revenue for government spending which will increase economic welfare for various groups
What is a subsidy
A subsidy is a grant paid to a producer with the purpose of reducing costs and increasing output
What are price controls?
Price controls are government regulated prices that set prices either above or below the equilibrium price
- price ceiling and a price floor
Define a price ceiling
A price ceiling is a legislated maximum price that sellers are allowed to charge in the market
- Benefit consumers
Define a price floor
A price floor is a legislated minimum price that can be paid in a market for goods and services.
- Somewhere above market price
- Benefit producers
What are the effects of a subsidy on a market?
- Consumers are better off because they now pay a lower price and consumer a greater quantity
- Consumer surplus increases Cost of subsidy is greater than combined increase in consumer and producer surplus
- Subsidy creates a DWL because total surplus or economic welfare has been reduced
- Subsidy is inefficient as it results in a DWL
What are the effectys of a price ceiling
- Shortage created
- Some consumers are happy but other consumers miss out
- Shortage can lead to a higher black market price
- All sellers lose as they have less goods and receive lower price
- Decrease in total surplus (DWL)
- Price ceiling has resulted in the market failing to produce optimal quantity – inefficient
Effects of a price Floor
- Producer surplus increases
-Consumers are unhappy – paying more for pizza and receiving less - Consumer surplus has decreased
- Net result (increase in PS but decrease in CS) = decrease on total surplus (DWL)
- Price floor has resulted in market failing to produce optimal quantity and is therefore inefficient
