Welfare and Economic Surplus Flashcards

Vocabulary-based flashcards covering the concepts of consumer and producer surplus, deadweight loss, and government market interventions like price ceilings and floors.

Economic Welfare

Also known as Social or Community Surplus, it is the combination of the surplus benefit experienced by both consumers and producers in an economic transaction.

Economic Surplus (Welfare) Formula

$$Economic Surplus (Welfare) = Consumer Surplus + Producer Surplus$$

Consumer Surplus

The difference between the maximum amount a consumer is willing to pay for a good and the amount actually paid, which is the market price.

Market Consumer Surplus Calculation

Measured by the area under the demand curve and above the line representing the purchase price of the good.

Aggregate Consumer Surplus Example

Calculated as \frac{1}{2} \times (\$20 - \14) \times 6500 = \$19,500$ for a market with $6500$ units and a price difference of $\$6$.

Producer Surplus

The difference between the price a firm receives (market price) and the price it would be willing to sell the good at.

Market Producer Surplus

The sum of surplus of all producers, represented by the area above the supply curve and below the market price.

Deadweight Loss

The net loss of total surplus, including both consumer and producer surplus.

Welfare in a Competitive Market

A state where the welfare benefit is maximum and there is no deadweight loss.

Price Ceiling

A government-imposed maximum price set below the market clearing level (equilibrium price), such as price controls on essential commodities or drugs.

Price Ceiling Welfare Effects

Consumers gain rectangle $A$ but lose triangle $B$; producers lose rectangle $A$ and triangle $C$; deadweight loss is the sum of triangles $B$ and $C$.

Price Floor

A government-imposed minimum price set above the market clearing level (equilibrium price), such as minimum wage laws.

Price Floor Welfare Effects

Consumers lose rectangle $A$ and triangle $C$; producers lose triangle $B$; deadweight loss is the sum of triangles $B$ and $C$.

Reasons for Government Intervention

Motivations including Health and Safety, Ethics, Morality and Religion, Fairness, and Restrictions on Who Can Trade.

Minimum Support Price (MSP)

An example of a government-imposed price floor applied specifically to agricultural products.