Econ module 4 module 5

Willingness to pay

• the max amount the buyer will pay for that good. Willingness to pay measures how much the buyers value the good.

Welfare

gap between what you’re willing to pay vs what you are paying

Consumer surplus

the financial benefit you get when you buy a product for less than the maximum price you were willing to pay.

Producer surplus

 the amount a seller is paid for a good minus the sellers cost of providing it

When price decreases CS

will increase

Total surplus

value to buyers- cost to sellers

Allocation of resources is effective if it

maximizes total surplus

efficiency means

• The goods are consumed by the buyers who value them the most highly

• The goods are produced by the producers with the lowest costs

• Raising or lowering the quantity of a good would not increase total surplus

Pareto optemo

• Refers to the state of allocation of resources where it is impossible to make an individual better off without making at least one individual worse off 

• Doesn't say anything about fairness, its the action of having to take vs give 

Govt interventions

Actions taken by the government to regulate, influence, or control the market

Market efficiency

•  market equilibrium maximizes the total surplus, therefore it is the efficient outcome

Price floor

minimum price threshold something must be sold at, price floor not always at market equilibrium

Price ceiling

Sets maximum price for ceiling or good

Pos statement

they make a claim abt how the world is

norm statement

they make a claim about how the world should be

Most important revenue source

Individual taxes

Consumption Tax

Tax on final sale of product or a service

Per unit tax

imposed on each unit of goods being sold or purchased

Tax incidence

Analysis of how a tax burden is divided between consumers and producers

Deadweight Loss

the total loss of economic efficiency and societal welfare that occurs when a market is pushed out of equilibrium, meaning mutually benfitial trades come to a stop.

Welfare Economics theorem

Competitive market equilibrium leads to pareto efficient allocation of resources

Income tax

Imposed on individuals or entities that varies with respect to incomes

Income tax types

• Progressive tax: takes a larger percentage from high income group of people

• Proportional tax- takes the same percentage of income from all

• Regressive tax- takes a larger percentage from low income group of people

Lorenz curve

graphic distribution of wealth — 45 degree line is ideal

Gini coefficient

statistical measure of economic dispersion A/A+B

Tax allows government to allocate resources but,

results in a total reduction of total resources

Utility

measurement of benefit or satisfaction a customer gains from consuming one unit of a good or service

Marginal Utility

The extra satisfaction gained from consuming one unit of a good or service

Diminishing Marginal Utility Theory

As a person consumes more of a good, additional utility gained from each unit decreases

Utility maximization

• Find the just affordable combinations

• Find the total utility for each just affordable combination

• The utility maximizing combination is the consumers choice

Utility maximizing rule

• Spend all available income

• Equalize the marginal utility per dollar for all goods and services

Budget Equation

P1Q1+P2Q2=7 (Change in income shifts budget line but doesnt change slope

Normal Income

raw dollar amount of money earned or available

Real Income

Income measured in terms of the actual quantity of goods or services a consumer can buy (calculated as $Y / P$)24. It measures true purchasing power