Consumer and Producer Surplus, Price Floor and Price Ceiling

Flashcards covering key concepts from Unit 4 lecture notes on Consumer and Producer Surplus, Price Floor and Price Ceiling.

Allocation of resources

Refers to how much of each good is produced, which producers produce it, and which consumers consume it.

Welfare economics

The study of how the allocation of resources affects economic well-being.

Welfare

Measured through surpluses in welfare economics.

Willingness to Pay (WTP)

A buyer's maximum amount they will pay for a good, indicating how much they value it.

Marginal buyer

The buyer who would leave the market if the price were any higher; their WTP determines the height of the demand curve at any quantity (Q).

Consumer Surplus (CS)

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays (WTP - P).

Cost (for producers)

The value of everything a seller must give up to produce a good.

Willingness to sell

The measure for a seller to produce and sell a good/service only if the price received is greater than their cost.

Marginal seller

The seller who would leave the market if the price were any lower; their cost determines the height of the supply curve at each quantity (Q).

Producer Surplus (PS)

The amount a seller is paid for a good minus the seller's cost of providing it (P - cost).

Total surplus

The sum of consumer surplus and producer surplus (CS + PS); a measure of society's well-being.

Market efficiency

Occurs when the allocation of resources maximizes total surplus, implying goods are consumed by those who value them most, produced by those with the lowest costs, and the quantity produced is optimal.

Market failures

Situations where the 'market equilibrium is efficient' assumption no longer holds, often due to market power or externalities.

Market power

A situation where a single buyer or seller (or small group) can control market prices, leading to inefficient markets.

Externalities

The situation where decisions of buyers and sellers affect people who are not direct participants in the market, leading to an inefficient equilibrium from society's standpoint.

Price controls

Legal restrictions on how high or low a market price may go, imposed by governments.

Price ceiling

A legal maximum on the price at which a good can be sold.

Price floor

A legal minimum on the price at which a good can be sold.

Binding price ceiling

A price ceiling set below the equilibrium price, which causes a shortage in the market.

Shortage

A situation where the quantity demanded exceeds the quantity supplied, often resulting from a binding price ceiling.

Deadweight loss (DWL)

The fall in total surplus that results from an inefficiently low quantity transacted due to policies like price controls.

Black market

A market in which goods or services are bought and sold illegally, either because they are prohibited or because the equilibrium price is illegal.

Binding price floor

A price floor set above the equilibrium price, which causes a surplus (e.g., unemployment in the labor market).

Surplus (market effect)

A situation where the quantity supplied exceeds the quantity demanded, often resulting from a binding price floor.