Week 3 - Efficiency

Question 1

Consumer surplus

Answer 1

The difference between a buyer’s reservation price and the price actually paid.
It is the area on the supply and demand graph above the price and below the demand curve.

Question 2

Producer surplus

Answer 2

The difference between a seller’s reservation price and the price received
It is the area on the supply and demand graph below the price and above the supply curve.

Question 3

Total economic surplus

Answer 3

Consumer surplus + producer surplus

Question 4

Pareto efficient

Answer 4

An economic state where no one can be made better off without making someone else worse off.

Question 5

Competitive equilibrium

Answer 5

Occurs when supply matches the demand for a good meaning there are no shortages or surpluses - resources are allocated in the most efficient way.

Question 6

Difference between pareto efficiency and competitive equilibrium

Answer 6

Competitive equilibrium is a specific condition in markets whereas pareto efficiency is a broader criteria for optimal resource allocation.
In perfectly competitive markets, competitive equilibrium implies Pareto efficiency, but Pareto efficiency does not necessarily imply competitive equilibrium.

Question 7

Assumptions for a market to be pareto efficient

Answer 7

All benefits from consumption are captured in the demand curve
All costs from production are captured in the supply curve
Consumers are all perfectly informed
Low transaction cost
Market is perfectly competitive - all buyers and sellers have equal market power.

Question 8

Deadweight loss (DWL)

Answer 8

The reduction in total economic surplus.
The value of trades not made because of a change to the market (often taxes or price ceilings/floors etc)

Question 9

DWL for elastic and inelastic goods

Answer 9

DWL is larger for a more elastic good and lower for a more inelastic good.