Topic flash cards - A1
Consumer surplus
When a consumer pays less for a good than they were initially prepared to pay, this difference is the consumer surplus.
Producer surplus
When a producer receives more for a good than they were prepared to accept, this difference is the producer surplus.
Consumer surplus
= Area below the demand curve (D) and above the equilibrium price line (Pe).
Producer surplus
= Area above the supply curve (D) and below the equilibrium price line (Pe).
The relative amounts gained by producers and consumers are dependent on the …
Price elasticities of demand and supply.
PED & PES.
Subsidy
An amount of money paid by a government to the producer of a good/service to lower the cost of production. This should increase supply, which will lower the price and increase demand for the good/service.
Why should governments provide subsidies ?
Subsidies will encourage demand for a good because they will lower the cost of production. This should increase supply, which will lower the price and increase demand for the good/service.
The main purpose of taxes ?
Taxes increase the price of a good, which leads to a reduction in demand. Taxation shifts the supply curve to the left.
Subsidy graph comparison, inelastic and elastic demand:
- The more price inelastic the demand curve is, the greater the consumer’s gain is from the subsidy.
- The more price elastic the demand curve is, the greater the producer’s gain is from the subsidy.
Indirect tax graph comparison, inelastic and elastic demand:
- The more price inelastic the demand curve, the greater the tax burden for the consumer.
- The more price elastic the demand curve, the greater the tax burden for the producer.
Trade-off
When you have to choose between conflicting objectives because you can’t achieve all your objectives at the same time.
Opportunity cost
The benefit that’s given up in order to do something else.
