Total Surplus and Deadweight Loss Flashcards
what is total surplus
a measure of the net benefits to society from the production and consumption of the good after taking into account the cost of resources
what are the 2 formulas for total surplus
consumer surplus + producer surplus
total benefits - total costs
how does total surplus indicate efficiency and what type of market will maximise TS
when total surplus is being maximised at equilibrium - resources are being allocated efficiently
only competitive markets produce at equilibrium
what is dead weight loss and when does it occur
when total surplus is is reduced because of under or over production the market has been prevented from producing optimal/efficient quantity at eql
what is an example of underproduction that causes DWL
MONOPOLY
firms use their market power to restrict production to increase price which reduces total surplus
what is an example of overproduction that causes DWL
INDUSTRY THAT POLLUTES ENVIRO
when firms pollute they reduce their own private production costs but impose external costs on the rest of society. the firm does not pay for the costs of polution and the market allocates too many resources to them therefore overproduction
Explain the Cyclone Yasi example of why a shift in equilibrium is not dead weight loss
CY wiped out banana crops in QLD - supply decreases and price increased therefore quantity demanded decreased
Explain the Cyclone Yasi example of why a shift in equilibrium is not dead weight loss
CY wiped out banana crops in QLD - supply decreases and price increased therefore quantity demanded decreased
as long as the market is still free to move to a new eql then it is still efficient as resources are still being maximized despite total surplus being lower
it would only be inefficient if the market were prevented from shifting stopping a rise in prices
