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Consumer Surplus
the difference between a buyer’s reservation price and the price actually paid
Producer Surplus
the difference between a seller’s reservation price and the price received
Total Economic Surplus (Total Welfare)
Consumer Surplus + Producer Surplus
Pareto Efficient
no one can be made better off without making someone worse off
Competitive Equilibrium
the benchmark of efficiency
What will be true when the Market Equilibrium is Pareto Efficient?
All benefits from consumption are captured by the demand curve
All costs from production are captured by the supply curve
Information
Low transaction cost
Perfectly competitive market
Price Ceilings
DWL - Deadweight Loss
the reduction in total economic surplus (orange area) - price we have to pay for the government policy
Price Floor
Efficiency isn’t the only Goal
Equity vs efficiency
But efficiency should be first goal
Economic policy