ECON 2113 Exam 2
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64 Terms
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The buyers' willingness to pay can be represented through...
The demand curve
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The sellers' costs of producing a good can be represented through..
The supply curve
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The consumer surplus benefits the...
Buyer
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The producer surplus benefits the...
Seller
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What is the total surplus?
The sum of consumer and producer surplus, the total benefit in society/economy
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What is welfare economics?
The study of how the allocation of resources affects economic well-being
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What is willingness to pay?
Maximum amount that a buyer will pay for a good
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How is consumer surplus calculated?
A buyer's willingness to pay minus the price the buyer actually pays
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The price on the demand curve represents...
The willingness to pay of the marginal buyer
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On the demand curve, the consumer surplus is...
The area below the demand curve and above the price
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When the price falls, the consumer surplus...
Increases
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What is cost?
The value of everything a seller must give up to produce a good
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How is producer surplus calculated?
The amount a seller is paid for a good minus the seller's cost
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The price on the supply curve represents...
The willingness to supply by the marginal seller
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How is producer surplus represented on the supply curve?
The area above the supply curve and below the price
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When price rises, the producer surplus...
Increases
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Total surplus is...
The value to buyers + cost to sellers
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What is efficiency?
Allocation that maximizes total surplus
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What is equity?
Fair distribution of well-being in society
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At the market equilibrium price, buyers...
Who value the product more purchase it
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A free market allocates goods to buyers with...
The highest willingness to pay
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At the market equilibrium price, sellers...
With the lowest costs produce the product
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How does a free market affect sellers?
Makes the most efficient sellers to produce
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T/F: Total surplus is minimized at the market equilibrium
False. It is maximized at the market equilibrium
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If the amount produced is smaller than the equilibrium quantity...
1. The value of the product to buyers is \__________ than the cost to sellers
2. Total surplus would rise if output \____________
1. The value of the product to buyers is \__________ than the cost to sellers
2. Total surplus would rise if output \____________
1. The value of the product to buyers is greater than the cost to sellers
2. Total surplus would rise if output increases
2. Total surplus would rise if output increases
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If the amount produced is larger than the equilibrium quantity...
1. The value of the product to buyers is \__________ than the cost to sellers
2. Total surplus would rise if output \__________
1. The value of the product to buyers is \__________ than the cost to sellers
2. Total surplus would rise if output \__________
1. The value of the product to buyers is less than the cost to sellers
2. Total surplus would rise if output decreases
2. Total surplus would rise if output decreases
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Markets are efficient when
There are perfectly competitive markets and no externalities
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T/F Market equilibrium may not be efficient if perfectly competitive markets and no externalities exist
True
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T/F: If there is market failure public policy will not remedy it
False, it can potentially remedy it
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Inefficiency means...
Market outcome with less than maximum total surplus, leads to deadweight loss
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Examples of public policy are...
Taxes, subsidies, quotas, price ceilings, price floor
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What are some effects of market failure?
Underproduction and overproduction
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What is underproduction?
Less is traded than determined by the market equilibrium
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What is overproduction?
More is traded than determined by the market equilibrium
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When the quantity traded is different from the efficient levels, there is...
Deadweight loss
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What is deadweight loss?
A decrease in both consumer surplus and producer surplus due to inefficient level of production
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If a buyer has to pay a certain dollar for each unit of a good purchased...
It causes a decrease in demand
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T/F: The demand curve shifts down by the amount of the tax levied
True
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T/F: Taxes encourage market activity
False, they discourage it
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T/F: Both buyers and sellers share the burden of taxes
True
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What is tax incidence?
How the burden of a tax is shared
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How do higher prices due to taxes affect the consumer surplus?
The consumer surplus must go down
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How do sellers experiencing lower prices affect the producer surplus?
The producer surplus must go down
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T/F: Since buyers send taxes to the government, only the buyer pays for the tax
False, BOTH buyers and sellers pay for tax
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T/F: Due to taxes, the buyer has to pay more, and the seller receives less
True
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If taxes are added to the supplier, the supply shifts \____________ by \____________
The supply shifts up by the amount of the tax
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T/F: Regardless of who pays the tax to the government, the burden to buyers and sellers is the same
True
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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
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Elastic supply/demand is represented by... (flat/steep curve)
Flat curve
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Inelastic supply/demand is represented by... (flat/steep curve)
Steep curve
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With elastic supply and inelastic demand, who pays more?
The buyers
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With inelastic supply and elastic demand, who pays more?
The sellers
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In general, the less elastic side of the market pays \___________
More
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How is the tax wedge calculated?
The buyer's price minus the the seller's price
T \= Pb - Ps
T \= Pb - Ps
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How is tax revenue calculated?
Tax revenue \= T * Q
T \= height of the tax wedge
Q \= quantity sold under the tax
T \= height of the tax wedge
Q \= quantity sold under the tax
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What is A and F on the graph?
A \= Consumer surplus after tax
F \= Producer surplus after tax
F \= Producer surplus after tax
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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
D, E, F \= producer surplus before tax
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Total surplus (on the welfare analysis graph) is equal to
(A + B + C) + (D + E + F)
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Consumer surplus (on the welfare analysis graph) changes by \____________ after tax
\- B - C
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Producer surplus (on the welfare analysis graph) changes by \_____________ after tax
\- D - E
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Tax revenue (on the welfare analysis graph) changes by \____________ after tax
\+ B + D
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Total surplus changes by \_____________ after tax
\- C - E
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C + E represents....
Deadweight loss
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Deadweight loss (in relation to taxes) refers to...
The fall in total surplus that results from a market distortion, such as a tax