Week 3 - Welfare and price controls in the competitive market Flashcards
What does the Marginal cost curve show
The change in total cost divided by the change in output
What is Producer surplus
The difference between the amount producers are willing to supply goods for and the amount received by producers
What is Consumer surplus
The difference between the amount consumers are willing to buy goods for and the amount paid by consumers
What is Total market surplus
The sum of consumer and producer surplus
Represents the total welfare realised through trade (gains from trade)
When is Total surplus maximised
At the competitive market equilibrium
Use an expression to show what happens to total market surplus when a negative surplus is introduced
CS + PS - NS < CS + PS
What is Dead Weight Loss (DWL)
Represents the lost total surplus that results from a market distortion (unrealised gains from trade)
What does the Demand curve represent
The quantity of a good that consumers are willing and able to purchase at every conceivable price
What does the Supply curve represent
The quantity of a good that producers are willing and able to provide to the market at every conceivable price
How do you calculate Consumer surplus for the linear demand function
CS = Q1 x (PD0 - P1) / 2
How do you calculate Producer surplus for the linear supply function
PS = Q1 x (P1 - PS0) / 2
How do you calculate Total revenue
TR = equilibrium price x equilibrium quantity
What is a Minimum price/Price floor
A price control in which prices must not fall below
What is a Maximum price/Price ceiling
A price control in which prices must not rise above
What are the 3 functions of the Price mechanism
- Rationing
- Signalling
- Incentivising
