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47 Cards in this Set
- Front
- Back
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Consumer Surplus |
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer receives Willing-Actual = CS 6-3.50 = 2.50 is CS |
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Producer surplus |
The difference between the lowest price firm would be willing to accept for a good or service and the price it actually receives |
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When a government imposes a price ceiling or floor the amount of economic surplus in a market is... |
Reduced |
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How do you measure the total consumer surplus in a market |
The demand curve |
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Demand curve |
A graph that shows the willingness of consumers to purchase a product at different prices |
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Supply curve |
A graph showing the willingness of firms to supply a product |
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Marginal cost does what if more of the good is produced in a given time period |
Increases |
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Output is efficient when |
Where all the marginal benefit exceeds the marginal cost Maximizes the sum of consumer and producer surplus |
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Consumer surplus + producer surplus = economic surplus |
At competitive equilibrium the ES is maximized |
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Deadweight lost |
The reduction of economic surplus resulting from a market not being in competitive equilibrium In a competitive equilibrium deadweight lost is zero The inefficiency in a market place B+C |
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Price ceiling |
Legally determined maximum price sellers can charge |
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Price floor |
Legally determined minimum price that sellers may receive |
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Triangle area formula for consumer and producer surplus |
Area= 1/2 (base) (height) |
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When a government taxes will more or less of the good be produced |
Less |
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Tax incidence |
The division of the burden of a tax between buyers and sellers |
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Externality |
A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service They interfere with economic efficiency A side effect |
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Private cost |
Cost borne by the producer of a good or service |
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social cost |
Total cost of producing a good or service Social cost = private cost + externalities |
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Private Benefit |
The benefit received by the consumer for the good or service |
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Social benefit |
The total benefit from consuming a good or service Social benefit = private benefit + external benefit |
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Market failure |
Situations in which the market fails to produce the efficient level of output |
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Property right |
The rights individuals or businesses have to the exclusive use of their property |
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What do good property right do |
They avoid market failure |
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What is a result of incomplete property rights |
Externalities |
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Coase theorem |
If transaction costs are low private bargaining will result in an efficient solution to the problem of externalities |
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Transaction costs |
The cost in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods and services |
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Subsidy |
An amount paid to producers or consumers to encourage the production or consumption of a good |
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Pigovian taxes |
Increase efficiency while bringing in tax revenue Using government tax and subsidy to bring about an efficient level of output in the presence of externalities |
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Rivalry |
The situation that occurs when one persons consuming a unit of a good means no one else can consume it |
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Excludability |
The situation in which anyone who does not pay for a good cannot consume it |
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4 Categories |
Private goods Public goods Quasi-public goods Common resources |
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Private good |
A good that is both a rival and excludable |
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Public good |
Both non-rival and non-excludable National defence |
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Quasi-public good |
Some goods are excludable but not rival Cable |
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Common resources |
A good is rival but not excludable Forest land |
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Market demand curve for private good |
Add horizontally the quantity of the good at each price by the consumer |
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Demand curve for a public good |
Add the price at which each consumer is willing to ourchase each quantity of the good |
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Price elasticity of Demand |
It is more useful to have a measure of the responsiveness of the quantity demanded to a change in price |
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Price elasticity of demand |
Quantity demanded changes a lot in response to a price change PED= percentage change in quantity demanded/ percentage change in price Elastic: if PED Is larger than -1 Inelastic: if PED is smaller than -1 Unit price elastic: if PED equals -1 |
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To calculate price elasticity |
1. Average quantity and price 2. Calculate percentage change in Q and P (Q2-Q1/avg) (P2-P1/avg) x 100% 3. Percentage change of Q/P |
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A vertical demand curve is |
Perfectly inelastic |
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A horizontal demand curve is |
Perfectly elastic |
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Determinatives of PED |
1. The availability of close substitutes 2. The passage of time 3. Wether the good is luxury or necessity 4. Definition of the market 5. The share of a good in consumer budget |
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Is elasticity-constant |
No |
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Norman and necessity products elasticity |
Positive but less than 1 |
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Normal and luxury elasticity |
Positive and greater than 1 |
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Inferior product in elasticity |
Negative |
