Understanding Markets 3 Flashcards
When equilibrium of the supply and demand curve is shifted, what differs when the curve that is not shifted is inelastic or elastic?
Inelastic -> change in price > change in quantity
Elastic -> change in quantity > change in price
Two main mechanisms of government intervention
Price ceilings/floors and taxes
What does marginal willingness to pay show?
how much we valued the last unit bought
What is consumer surplus?
the difference between the
maximum amount a consumer would be willing to pay for her or his actual level of consumption and what they actually pay
What does Minimum supply
price equal in a competitive market?
Marginal cost
What does minimum supply price show?
how much the firm needs for the last unit sold
Producer surplus is the
difference between
the minimum amount a firm would be willing to accept for its current level of production
and what it actually receives
Producer surplus =
profit before deducting fixed costs, for variable costs are the area under the MC curve
What is a deadweight loss
When a price ceiling/tax leads to a loss of consumer and producer surplus from the
buyers and sellers who cannot trade
The normal supply curve, S(p) shows
how much firms are
willing to sell as a function of the amount they get, p
What does tax do to the supply curve?
Shifts upwards
How does a flatter demand curve affect sales tax?
Increase buyer tax, lower seller tax
3 features of a good tax
- Easy to collect
- Non-distorting -> doesn’t change decisions or cause deadweight losses
- Progressive - poorer people pay less, not regressive
What type of market do deadweight losses affect the most?
Elastic demand and supply since firms and consumers will respond to them
