Eco exam points - Market equilibrium

impact on allocative efficiency

the increase in consumer surplus is greater than the combined loss in producer surplus and government revenue, and therefore there is a net gain in society’s welfare. This has improved the efficiency of resource allocation in the market, removing DWL and leading to increased total surpluses

explain change in consumer surplus

consumer surplus increases from __ to because the price consumers pay decreases from __ to __, increasing the difference between the price consumers are willing to pay and the price they actually pay. Also consumers increase the quantity of yachts they demand from __ to __, increasing the units from which they can accumulate a surplus.

explain change in producer surplus

producer surplus decreases from __ to __ because suppliers receive a lower price than before, decreasing from __ to __. This decreases the difference between the price they are willing to accept and the price they actually receive. They also decrease the quantity they supply from __ to __, decreasing the number of units they accumulate a surplus from.

market efficiency

-state the original equilibrium

-state increase in supply

-at the original price P1 there is now a surplus (Q1 to Q3)

-This will cause firms to drop their prices to get rid of excess supply

-as the price decreases, QD increases (law of demand - as price decreases consumers are more able to afford)

-as the price decreases, QS decreases (law of supply - as price producers produce less profitable)

-price stops decreasing at P2 where new equilibrium is restored, and there is no longer surplus

explaining effect of tax on allocative efficiency

The combined decrease in consumer surplus and producer surplus is greater than the tax revenue gained by the government. There is a net loss in society’s welfare, deadweight loss of __. The tax has distorted price signals in the market and led to a less efficient allocation of resources. Society would be better off if the tax were removed, and the market returned to equilibrium where total surpluses are maximised.