Economics Week 4

Efficiency of Markets and Government Intervention

Consumer Surplus

= MB - Price. The Marginal Benefit from a good or service minus the price paid for it, summed over the quantity consumed.

Producer Surplus

= Price - MC. The price received for a good minus the marginal cost of producing it.

Total Surplus

= CS + PS. The sum of consumer and producer surplus, which is maximised at the efficiency quantity.

Total Benefit

= Amount Paid + CS. The total value received by consumers, combining their actual expenditure and their surplus.

Total Cost

= Total Revenue - PS. The total cost of production is represented by the area under the Marginal Cost (Supply) curve.

Allocative Efficiency Condition

MB = MC. The point where the marginal benefit to consumers equals the marginal cost to producers

Marginal Social Cost (MSC)

= MC + Marginal External Cost. The total cost to society, including both private production costs and external costs (pollution or noise).

Socially Efficient Output

MSC = MB. The level of production where the total benefits to society (consumers) equal the total costs of production (producers). It maximises overall happiness or wealth, known as “social surplus”, meaning resources are not wasted and no one can be better off without making someone else worse off.

Tax

= Price paid by buyer - Price received by seller. The total tax per unit, which creates a wedge between what the buyer pays and the seller keeps

Value (Marginal Benefit (MB))

The maximum amount a buyer is willing to pay for a unit of a good. It is essentially the most you would pay for one more item.

Price

The monetary amount paid by the buyer to the seller

Demand Curve

A graph showing how much people value each unit. It is also referred to as the Marginal Benefit (MB) curve.

Supply Curve

A graph showing the cost of producing each extra unit. Also referred to as the Marginal Cost (MC) curve.

Efficiency

Using scarce resources to create the most possible value (occurs when MB = MC). Getting the absolute most out of what you have.

Equity

The fairness of how resources, goods, or income are distributed. Ensuring things are shared in a fair way.

Fair Result

A view of fairness focused on outcomes, such as income distribution.

Fair Rules

A view of fairness focused on the process and equality of opportunity.

Price Ceiling

A legal maximum price set below the market equilibrium (e.g. rent control)

Deadweight Loss (DWL)

The loss in total surplus when a market is inefficient and MB does not equal MC. It’s the value lost to everyone because the market is broken.

Search Activity

Time and effort spent looking for goods when there is a shortage.

Black Market

An illegal market where goods are sold above a government price ceiling. A hidden, illegal market for scarce goods.

Price Floor

A legal minimum price set above the market equilibrium (e.g. minimum wage).

Tax Incidence

The division of a tax burden between the buyer and the seller. Figuring out who really ends up “paying” the tax.

Consumer Tax Burden = Es/(Ed+Es)
Producer Tax Burden = Ed/(Ed+Es)

Ed = Elasticity of Demand

Es = Elasticity of Supply

Elasticity

The measure of how much quantity demanded or supplied changes in response to price changes.

Inelastic Demand/Supply

If demand is inelastic, consumers bear more tax. If supply is inelastic, producers bear more tax.

Tax Wedge

The difference between the price consumers pay and the price producers