ECON 211 Chapter 7

non binding price floor (shortage)

below equilibrium price

binding price floor (surplus)

above equilibrium price

welfare economics

study of how allocation of resources affects economics well-being

willingness to pay

highest price a buyer is willing to pay for a good or how much a buyer values a good

consumer surplus

difference between wtp and actual price or buyer’s gain from trade

oppurtunity cost represents

lowest price at which sellers are willing to sell

producer surplus

difference between price received by seller and seller’s oppurtunity cost or seller’s gain from trade

total surplus

all gains from trade in the market

efficient outcome

outcome that maximizes total surplus

why is q* efficient?

good goes to buyer who values it the most and is produced by sellers with lowest oppurtunity cost

first criteria of efficient outcomes

all beneficial trades are made, value>cost

second criteria of efficient outcomes

no wasteful trades are made, cost>value

CS without tax

ABC

PS without tax

DEF

Tax Revenue without Tax

none

Total Surplus without tax

ABCDEF

CS with tax

A

PS with tax

F

Tax revenue with tax

B+D

Total Surplus with tax

AFBD

CS change

-(B+C)

PS change

-(D+E)

Tax Revenue change

B+D

Total Surplus change

-(C+E)

Dead Weight Loss

decrease in total surplus from a market distortion, such as tax

tax revenue=

T*Q1