Untitled Deck Flashcards
What is consumer surplus?
Consumer surplus is the value that consumers receive from participating in market transactions. It is the difference between the most they would pay for something and the price they actually have to pay for it.
On a supply and demand graph, consumer surplus is measured by the area under the demand curve and above the price.
What is producer surplus?
Producer surplus is the benefit that producers receive from participating in market transactions. It is the difference between what they sell their product for and the least they would be willing to receive to sell their product.
On a supply and demand graph, producer surplus is measured by the area above the supply curve and below the price.
How do shifts in supply and demand affect consumer and producer surplus?
An inward shift in supply will cause consumer surplus to fall, while an outward shift in supply raises consumer surplus. An inward shift in demand leads to a drop in producer surplus, and outward demand shifts have the opposite effect.
What happens when the government imposes price regulations?
Price regulations create excess demand or excess supply of the good and result in deadweight loss.
A more efficient way to help consumers and suppliers would be a direct transfer of income from one side to the other without changing the price.
What is the effect of government-imposed quotas or output caps?
Quotas or output caps change the market and create a deadweight loss, but do not create excess demand or supply because prices can adjust and clear the market.
How do taxes affect consumer and producer surplus?
Taxes reduce output and raise price, thereby reducing consumer and producer surplus while generating tax revenue.
The difference between the revenue generated and the damage to surplus is the deadweight loss of the tax.
What is the concept of tax incidence?
Tax incidence tells us who really bears the burden of a tax, which depends on the elasticities of demand and supply rather than who pays the tax by law.
What is the effect of subsidies on consumer and producer surplus?
Subsidies increase both consumer and producer surplus relative to the free-market equilibrium, but they still create a deadweight loss.
