econ 201 lecture 17 and beyond

Economic efficiency

Total surplus (Consumer + Producer) is maximized.

Deadweight loss (DWL)

Loss of total surplus from inefficient quantity due to taxes, price controls, or tariffs.

Consumer surplus

Willingness to pay - Price paid (Area below demand, above price).

Producer surplus

Price received - Production cost (Area above supply, below price).

Tax wedge

Gap between buyer price (Pb) and seller price (Ps) from a tax.

Tax incidence

How tax burden is split based on supply & demand elasticity.

Government tax revenue

Tax per unit * Quantity sold (Qt * (Pb - Ps)).

Deadweight loss of taxation

Welfare loss triangle from reduced quantity under a tax.

Determinant of exports

World price above domestic price -> export.

Determinant of imports

World price below domestic price -> import.

Welfare effect of exports on producers

Producer gains > consumer losses -> net gain.

Welfare effect of imports on consumers

Consumer gains > producer losses -> net gain.

Tariff

Tax on imports raising domestic price above world price.

Tariff revenue formula

Import quantity * Tariff rate.

Economic justifications for tariffs

Protecting jobs, national security, and infant industries.

Externality

Uncompensated impact of an action on a bystander.

Market outcome with a negative externality

Overproduction past social optimum because private costs ignore external costs.

Social cost

Private cost + External cost.

Explicit costs

Out-of-pocket cash expenses (wages, rent).

Implicit costs

Opportunity costs with no cash outlay (resources owned by firm).

Marginal product of labor (MPL)

Extra output per extra worker (Change in Q / Change in L).

Decrease marginal product

Each extra worker adds less output than the previous one.

Fixed costs

Costs unchanging with production quantity (rent).

Marginal cost (MC)

Change in Total Cost / Change in Quantity (Change in TC / Change in Q).

Relationship between marginal cost and average total cost

MC crosses ATC at its min; if MC < ATC, ATC falls; if MC > ATC, ATC rises.

Binding price floor

Price floor set above equilibrium -> surplus.

Non-binding price floor

Price floor set at/below equilibrium -> no effect.

Binding price ceiling

Price ceiling set below equilibrium -> shortage.

Non-binding price ceiling

Price ceiling set at/above equilibrium -> no effect.

Absolute advantage

Producing a good using fewer inputs than another producer.

Comparative advantage

Producing a good at a lower opportunity cost than another.

Opportunity cost

What must be given up to get an item.

Acceptable trade price range

Price range between opportunity costs of two trading countries.

Accounting profit

Total Revenue - Explicit Costs.

Economic profit

Total Revenue - Explicit Costs - Implicit Costs.