Studied by 5 peopleThe buyers' willingness to pay can be represented through...
The demand curve
The sellers' costs of producing a good can be represented through..
The supply curve
The consumer surplus benefits the...
Buyer
The producer surplus benefits the...
Seller
What is the total surplus?
The sum of consumer and producer surplus, the total benefit in society/economy
What is welfare economics?
The study of how the allocation of resources affects economic well-being
What is willingness to pay?
Maximum amount that a buyer will pay for a good
How is consumer surplus calculated?
A buyer's willingness to pay minus the price the buyer actually pays
The price on the demand curve represents...
The willingness to pay of the marginal buyer
On the demand curve, the consumer surplus is...
The area below the demand curve and above the price
When the price falls, the consumer surplus...
Increases
What is cost?
The value of everything a seller must give up to produce a good
How is producer surplus calculated?
The amount a seller is paid for a good minus the seller's cost
The price on the supply curve represents...
The willingness to supply by the marginal seller
How is producer surplus represented on the supply curve?
The area above the supply curve and below the price
When price rises, the producer surplus...
Increases
Total surplus is...
The value to buyers + cost to sellers
What is efficiency?
Allocation that maximizes total surplus
What is equity?
Fair distribution of well-being in society
At the market equilibrium price, buyers...
Who value the product more purchase it
A free market allocates goods to buyers with...
The highest willingness to pay
At the market equilibrium price, sellers...
With the lowest costs produce the product
How does a free market affect sellers?
Makes the most efficient sellers to produce
T/F: Total surplus is minimized at the market equilibrium
False. It is maximized at the market equilibrium
If the amount produced is smaller than the equilibrium quantity...
The value of the product to buyers is __________ than the cost to sellers
Total surplus would rise if output ____________
The value of the product to buyers is greater than the cost to sellers
Total surplus would rise if output increases
If the amount produced is larger than the equilibrium quantity...
The value of the product to buyers is __________ than the cost to sellers
Total surplus would rise if output __________
The value of the product to buyers is less than the cost to sellers
Total surplus would rise if output decreases
Markets are efficient when
There are perfectly competitive markets and no externalities
T/F Market equilibrium may not be efficient if perfectly competitive markets and no externalities exist
True
T/F: If there is market failure public policy will not remedy it
False, it can potentially remedy it
Inefficiency means...
Market outcome with less than maximum total surplus, leads to deadweight loss
Examples of public policy are...
Taxes, subsidies, quotas, price ceilings, price floor
What are some effects of market failure?
Underproduction and overproduction
What is underproduction?
Less is traded than determined by the market equilibrium
What is overproduction?
More is traded than determined by the market equilibrium
When the quantity traded is different from the efficient levels, there is...
Deadweight loss
What is deadweight loss?
A decrease in both consumer surplus and producer surplus due to inefficient level of production
If a buyer has to pay a certain dollar for each unit of a good purchased...
It causes a decrease in demand
T/F: The demand curve shifts down by the amount of the tax levied
True
T/F: Taxes encourage market activity
False, they discourage it
T/F: Both buyers and sellers share the burden of taxes
True
What is tax incidence?
How the burden of a tax is shared
How do higher prices due to taxes affect the consumer surplus?
The consumer surplus must go down
How do sellers experiencing lower prices affect the producer surplus?
The producer surplus must go down
T/F: Since buyers send taxes to the government, only the buyer pays for the tax
False, BOTH buyers and sellers pay for tax
T/F: Due to taxes, the buyer has to pay more, and the seller receives less
True
If taxes are added to the supplier, the supply shifts ____________ by ____________
The supply shifts up by the amount of the tax
T/F: Regardless of who pays the tax to the government, the burden to buyers and sellers is the same
True
T/F: The burden of tax is always shared equally, even in inelastic/elastic markets
False, it can depend if the supply is elastic and the demand inelastic, or vice versa
Elastic supply/demand is represented by... (flat/steep curve)
Flat curve
Inelastic supply/demand is represented by... (flat/steep curve)
Steep curve
With elastic supply and inelastic demand, who pays more?
The buyers
With inelastic supply and elastic demand, who pays more?
The sellers
In general, the less elastic side of the market pays ___________
More
How is the tax wedge calculated?
The buyer's price minus the the seller's price T = Pb - Ps
How is tax revenue calculated?
Tax revenue = T * Q T = height of the tax wedge Q = quantity sold under the tax
What is A and F on the graph?
A = Consumer surplus after tax F = Producer surplus after tax
What does the area of A, B, C and D, E, F refer to?
A, B, C = consumer surplus before tax D, E, F = producer surplus before tax
Total surplus (on the welfare analysis graph) is equal to
(A + B + C) + (D + E + F)
Consumer surplus (on the welfare analysis graph) changes by ____________ after tax
- B - C
Producer surplus (on the welfare analysis graph) changes by _____________ after tax
- D - E
Tax revenue (on the welfare analysis graph) changes by ____________ after tax
+ B + D
Total surplus changes by _____________ after tax
- C - E
C + E represents....
Deadweight loss
Deadweight loss (in relation to taxes) refers to...
The fall in total surplus that results from a market distortion, such as a tax
Note
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