A Level Microeconomics 5 - Consumer And Producer Surplus, Allocative Efficiency And Externalities.

Front 1

What is consumer surplus?

Back 1

The difference between the price that consumers are willing and able to pay for good or service and the market price.

i.e. the difference between the total value consumers place on all units consumed and the price they pay in order to purchase that good or service. It represents a benefit (additional utility) to the consumer.

Front 2

What area is original consumer surplus, new consumer surplus, and change in consumer surplus?

Back 2

Old consumer surplus: P0P1X

New consumer surplus: P0P2Y

Change in CS: P1P2XY (fall)

Front 3

The effect of a change in price on Consumer surplus will depend on...

Back 3

Size of the price change

PED (if PED is inelastic, ∆P will lead to a relatively smaller change in CS).

Ceteris Paribus

Front 4

What is producer surplus?

Back 4

The difference between the market price a firm receives and the price at which they would be prepared to supply.

Front 5

On this graph, where is original producer surplus, new producer surplus, and change in producer surplus?

Back 5

Old PS: PeX0

New PS: P1Y0

increase in PS: P1YXPe

Front 6

The size of a change in PS depends on...

Back 6

Size - if the increase in price is relitavely large then this means the increase in PS is also relitavely large.

PES - if PES is more elastic then more firms will join the market/firms will expand output as they can make more profit. This means that there is a greater increase/decrease in PS.

Ceteris Paribus - changes in other factors may affect size of shift in supply.

Front 7

What is the effect of an increase in demand on producer and consumer surplus?

Back 7

PS increases, CS increases.

Front 8

What is the effect of an increase in supply on consumer and producer surplus?

Back 8

CS increases, PS increases.

Front 9

What does a market do?

Back 9

Coordinates buyers and sellers (consumers and producers) to exchange goods and services.

Front 10

What does the interaction of demand and supply in a market determine?

Back 10

Equilibrium price and quantity.

Front 11

When will a market not achieve allocative efficiency?

Back 11

If market failure occurs.

Front 12

When is a market allocatively efficient?

Back 12

When consumer and producer surplus (social surplus/social welfare) is maximised. At the equilibrium point.

Front 13

If quantity demanded equals quantity supplied, a market is said to be...

Back 13

Allocatively efficient.

Front 14

Why is this so?

Back 14

Because resources are organised efficiently, and social surplus is maximised.

Front 15

What occurs in any situation but market equilibrium?

Back 15

Social welfare loss.

Front 16

In a free market economy, what do prices act to do?

Back 16

Signal information

Ration/allocate scarce resources amongst competing uses (on basis of ability to pay)

To provide an incentive via profit/utility maximisation.

Front 17

If their is excess demand in a market, how do prices help to achieve allocative efficiency?

Back 17

Prices rise. This leads to rationing (some consumers leave the market) and a contraction of Qd. In addition, signalling occurs due to the higher price, more producers enter the market to fulfil their incentive of profit maximisation. Supply extends.

This leads to the market reaching equilibrium price.

Front 18

If their is excess supply in a market, how do prices help to achieve allocative efficiency?

Back 18

Price decreases. This leads to rationing, as some producers leave the market, so there is a contraction in Qs. Signalling by lower prices means more consumers enter the market in order to maximise their utility. Qd extends. A new equilibrium price is reached, with excess supply eliminated.

Front 19

In a free market system, what does the price mechanism do?

Back 19

Distribute goods and services to achieve allocative efficiency.

Front 20

When will social surplus be maximised?

Back 20

When demand = supply, at the equilibrium point.

Front 21

At equilibrium output, what is the price that consumers lay first good or service equal to?

Back 21

The additional cost to society of producing it.

Front 22

Even if firms break even in economic terms, do they still make some profit.

Back 22

Yes, because profit is a cost of production, so a certain level of profit is included in calculating total costs.

Front 23

How did Adam Smith describe the market system?

Back 23

"The invisible hand" guiding people's actions.

Front 24

In a free market system, what is assumed to be consumers motivation?

Back 24

To maximise utility

Front 25

In a free market system, what is assumed to be firms' motivation?

Back 25

To maximise profit.

Front 26

In a free market system, what is assumed to be the factors of producion's motivation?

Back 26

To maximise income.

Front 27

What is consumer sovereignty?

Back 27

When, in a market system, consumer preferences determine how resources are employed and what goods and services are produced.

Front 28

When does market failure occur?

Back 28

When The price mechanism leads to an inefficient allocation of goods and services.

Front 29

What do MSC and MSB mean?

Back 29

MSC: Marginal social cost.

MSB: Mariano social benefit.

Front 30

What do MPB nd MPC mean?

Back 30

MPB: Marginal private benefit

MPC: Marginal private cost

Front 31

When is the equilibrium price allocatively efficient?

Back 31

When supply = MSC and demand = MSB, so all costs and benefits are taken into account.

Front 32

Social costs = ?

Back 32

private costs + external costs

Front 33

Social benefits = ?

Back 33

Private benefits + external benefits

Front 34

What does private/internal mean?

Back 34

Incurred by consumers/firms directly involved in the economic transaction.

Front 35

What is an external cost/benefit?

Back 35

A cost/benefit incurred by third parties i.e. those not involved I the economic transaction.

Front 36

What are externalities?

Back 36

Cost/benefits for their parties not associated with the economic transaction/not reflected in market price.

Front 37

What are the 4 types of externality?

Back 37

Positive production externality.

Negative production externality.

Positive consumption externality.

Negative consumption externality.

Front 38

What is the Y axis of a curve labelled when showing externalities?

Back 38

Price, cost, benefit.

Front 39

Why is this market allocatively efficient?

Back 39

Because supply = MSC and demand = MSB

Front 40

In an allocatively efficient market, what is the value consumers place on the last unit produced equal to?

Back 40

The full cost to society of producing the last unit.

Front 41

What needs to be taken into account for the market equilibrium to be equal to the allocatively efficient output?

Back 41

All costs and benefits.

Front 42

When MSB = MPC is the market allocatively efficient?

Back 42

No, it is only if MSB = MSC.

Front 43

If market quantity is greater than the social optimum, does this good have a negative or positive externality? Is it underproduced or overproduced?

Back 43

At outputs between the social optimum and market quantity, the cost to society is greater than the benefit. Therefore the good is overproduced and has negative externalities, resulting in a welfare loss.

Front 44

If market quantity is less that the social optimum, does this good have positive or negative externalities? Is it underproduced/consumed or overproduced/consumed?

Back 44

The cost to society is less than the befit at outputs from market quantity to the social optimum. This good is underproduced/consumed. This represents a welfare loss. This good has positive externalities.

Front 45

Draw a diagram showing a negative production externality.

Back 45

Front 46

What does MEC (Marginal external cost) = ?

Back 46

MSC (marginal social cost) - MPC (marginal private cost)

Front 47

Draw a diagram showing welfare loss from a positive production externality.

Back 47

Front 48

Draw a diagram showing the welfare loss from a negative consumption externality.

Back 48

Front 49

Draw a diagram showing the welfare loss from a positive consumption externality.

Back 49

Front 50

When does a welfare loss occur?

Back 50

When there is a divergence between Qm and Q*.

Front 51

What does the presence of externalities in a market mean?

Back 51

There will be a loss of social welfare in the market (allocative inefficiency).

Front 52

What is the effect of a negative production externality?

Back 52

The marginal social cost exceeds the marginal private cost. The good is overproduced. The market fails as it produces a level of output that is greater than the he socially optimum level and there is a welfare loss to society.

Front 53

What is the effect of a positive production externality?

Back 53

The marginal social cost is less than the marginal private cost. The good is underproduced. The market fails as it produces a level of output that is less than the he socially optimum level and there is a welfare loss to society.

Front 54

What is the effect of a negative consumption externality?

Back 54

The marginal social benefits are less than marginal private benefits. The good is over-consumed. The market fails as it produces an equilibrium level of output hat is greater than the socially optimum level of output and there is a welfare loss to society.

Front 55

What is the effect of a positive consumption externality?

Back 55

The marginal social benefit exceeds marginal private benefit. The good is under-consumed. The market fails as it produces an equilibrium level of output hat is less than the socially optimum level of output and there is a welfare loss to society.